Alternative Investment Industry Weighs in on Sovereign Wealth Funds and Heightened Regulatory Environment

ByBritt Tunick

January, 2016 –With assets under management by the alternative investment industry continuing to grow at a consistent pace, and the industry attracting a broader range of investors than ever before, there has been no shortage of regulatory scrutiny. In the years since the credit crisis, there has not only been a substantial increase in the number of regulations targeting the alternative investment industry, but the number of firms that have found themselves subjected to audits and regulatory issues has also risen significantly.

One group of investors that has substantially increased the amount of money it allocates to the alternative investment industry is sovereign wealth funds –a group of investors that has become so large in recent years that the assets it controls now dwarf the assets managed by both the global private equity and hedge fund industries themselves. As of September 2016, the AUM of sovereign wealth funds totals more than $7.4 trillion, up from just $3.2 trillion at the end of 2007. And that number is expected to continue rising as long as the countries investing in these funds keep generating inflows of cash.

Given the rapid growth of the size of sovereign wealth funds and the potential impact of their investments on markets around the world, coupled with regulators’ enhanced scrutiny of the alternative investment industry, the New York Hedge Fund Roundtable recently surveyed its membership about both of these topics. The Impact of Investment Strategies of Sovereign Wealth Funds on the Alternative Assets Markets was the topic at a recent Roundtable event, where Keith Black, a managing director of curriculum and exams for the Chartered Alternative Investment Analyst Association (CAIA) shared his views on the topic.

“Two years ago we were asking how much money sovereign wealth funds could accumulate,” said Black. “Now we’re asking how long these funds can stay financed,” he said, noting that the assets of China’s sovereign wealth fund, which is the world’s largest, dropped to $3.3 trillion, from $4 trillion, in the course of just one year. And given that somewhere in the neighborhood of $1 trillion of China’s sovereign wealth fund is in Treasury debt, he noted that if any kind of trade war takes place and the U.S. stops buying Chinese goods it could have a huge impact on the U.S. economy.

Roundtable members believe that the amount of assets under management by sovereign wealth funds will continue to rise. “The importance of sovereign wealth funds in the alternative investment industry has become a major topic of conversation for GPs.” said Adam Weinstein, president of the New York Hedge Fund Roundtable. “They are a major part of the limited partner base for some of the largest managers and continue to expand their reach globally.”

Meanwhile, despite the increased regulatory oversight of the industry, the majority of Roundtable members are more afraid of cyber security hacks than the possibility of being audited. Getting Through a Regulatory Audit: What to Expect and How to Prepare was the topic of another recent Roundtable event. “Cybersecurity is a consistent and major topic being discussed today and it is being taken incredibly seriously by those who want to protect their assets and those of their investors in addition to satisfying SEC scrutiny,” said Weinstein, commenting on the topic.

New York Hedge Fund Roundtable members had the opportunity to weigh in on both of these topics at recent Roundtable events, as well as through online electronic polls.

Following are some of the key findings of both surveys:

  • Asked whether they believe Donald Trump’s promises of protectionism will impact the flow of assets into sovereign funds, 81% of respondents said no, while only 19% believe it will.
  • When asked to indicate their outlook for assets controlled by export based sovereign wealth funds such as China and Singapore, 59% of respondents said they believe that assets in these countries will continue to rise; while 41% of respondents believe that declining commodity prices and trade wars will spur countries whose economies are heavily reliant on exports to either halt inflows into their sovereign wealth funds or to decrease the assets within them.
  • While more than 27% of sovereign wealth funds have significant exposure to alternative investments, they tend to favor real assets such as real estate and infrastructure. Given this reality, Roundtable members were asked how they expect sovereign wealth funds will change their exposure to hedge funds in the near future. 36% of respondents don’t expect any change; 33% think they will increase their hedge fund exposure; and 31% think they will decrease their hedge fund exposure.
  • Asked how they expect sovereign wealth funds to change their exposure to real assets in the near future, 46% of respondents think they will increase their real assets; 28% think they will decrease their real assets; and 26% don’t foresee any change.
  • When asked where they believe the price of a barrel of crude oil will end the first quarter of 2017, 41% of respondents said they think it will be in the $50 to $60 range; 32% think it will be in the $40 to $50 range; 14% think it will be between $60 and $70; 8% think it will be above $70 and 5% think it will fall below $35 per barrel. Comparatively, when Roundtable members were asked this same question back in April 2016, 66% of respondents predicted that oil would end 2016 in the $40 to $50 range; 28% predicted the $50 to $60 range; and 6% thought it would fall below $30 per barrel.
  • When asked if their firms have been the subject of a recent audit, 34% of respondents said they have; while 66% said they haven’t. Of those who have been audited, 31% have been audited in the past year; 19% within the past three years; and 50% within the past five years.
  • Asked what worries them most, 53% of respondents said it is a cyber security hack; 40% said it is increased regulations; and 7% said it is an audit.
  • 53% of respondents believe that the change in administration won’t impact the frequency of exams and audits, while 47% believe it will.
  • When asked how their firm would prepare for an audit, 40% of respondents said they would bring in external resources to help them prepare; 33% said they would prepare internally; and 27% said they would do a mock audit.
  • Asked which technologies their firms already rely on, or plan to begin using, to collect and maintain information that might be needed if they were audited, 34% of respondents said they use software that tracks and records all emails; 8% use compliance software that tracks and records all trades; and 58% of respondents said they use both types.
  • When asked who would lead things if their firm were subjected to an audit, 53% of respondents said it would be their chief compliance officer; 23% said it would be their chief executive officer; 12% said it would be their chief operating officer; and another 12% said they have no idea.

About The New York Hedge Fund Roundtable:

The New York Hedge Fund Roundtable is a non-profit organization focused on promoting ethics and best practices within the alternative investment industry. The membership consists of investors, fund managers and other industry professionals who regularly meet to discuss current issues within the industry and connect with peers. Monthly events center around thought-provoking speakers and panels designed to keep members apprised of timely and important issues within the alternative investment industry. The Roundtable’s goal is to provide a forum for thought leadership, where industry professional have the opportunity to enhance their knowledge and skills and to network with other individuals committed to advancing the industry with the highest ethical standards. For additional information about the Roundtable, visit: http://www.nyhfr.org

 

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