• Investors ready to aggressively allocate cash balances but will demand liquidity
• Investors overwhelmingly focused on four key strategies
• Managers anticipate redemptions will decrease dramatically from 4Q08 peak

NEW YORK, NY (June 2, 2009) – Barclays Capital, the investment banking business of Barclays Bank PLC, today announced the findings of Picking up the Pieces, a report on the state of the hedge fund industry, released by the firm’s Prime Services group.

The report is the result of market analysis and in-depth interviews with approximately 300 investors and 100 hedge fund managers, representing $700 billion of hedge fund industry assets, approximately half of the industry.

The surveyed investors reported holding an average of 14% of their portfolios in cash, which nearly 80% plan to reallocate during 2009. Picking up the Pieces indicates that hedge funds are therefore likely to see at least $50 billion of new allocations as investors look to slowly begin re-deploying the cash balances built up defensively during the recent market dislocation.

Pensions, traditionally limited in their hedge fund allocations, are expected to increase the weight of hedge fund exposure in their portfolios, alongside family offices. Insurance companies, private banks, endowments and foundations are all likely to decrease their allocations to hedge funds.

Brian Reilly, Managing Director, said, “In producing Picking up the Pieces, we found that in spite of dramatic changes in the investor landscape, certain investors were ready to deploy their cash balances aggressively once markets stabilized. Managers who develop early relationships with new investors will be the primary beneficiaries of this trend.”

Surveyed investors expressed a sharp trend away from highly leverage and high beta strategies into simpler, more liquid strategies and those which focus on opportunities in dislocated markets, notably distressed and directional credit.

Andrea Gentilini, Director, author of Picking up the Pieces, commented, “Our work also showed that the best positioned managers were those who explored creative solutions to better align investor and manager incentives. Providing investors with transparency, comfort around the protection of their assets, and a better alignment of incentives was rewarded much more by investors than simply discounting fees.”

Key findings from the analysis and interviews detailed in Picking up the Pieces include:

• Total investable assets contracted approximately 20% in 2008; hedge fund assets declined by 25% decline over the same period
• The total size of global investable assets shrank in 2008 to approximately $60 trillion, down some 20% from $75 trillion at the end of 2007
• Investors reported holding sizable amounts of cash – an average of 14%. With 80% of investors saying they plan to deploy the cash as markets stabilize during 2009
• The top three hedge fund investor segments are American pensions with $306 billion in investable assets, American private banks with $216 billion, and European private banks with $177 billion
• While most investor segments saw their investable assets decline during the year, Sovereign Wealth Funds, particularly those in the Middle East, saw their assets swell
• Investors’ average hedge fund allocation stood at 2.4% at the end of 2008, down only marginally from 2.6% at the end of 2007. North American Endowments & Foundations remained the largest allocator with approximately 14% of their assets invested in hedge funds
• Family offices and pension funds are expected to be the most active allocators in 2009 – a shift from 2008, which was dominated by Endowments & Foundations
• Pensions around the world, traditionally one of the most conservative investor types, are now boosting their $437 billion hedge fund allocation as they look to balance assets and liabilities
• Hedge fund managers expect redemption requests to fall to 10% of their AUM in 2009 from fourth quarter 2008 highs of 25%
• Global hedge fund assets under management expected to level off at $1.3 trillion by the end of 2009, after bottoming out at $1.2 trillion at mid-year
• Though the traditional ‘two and twenty’ model has survived industry turmoil, managers will be encouraged to embrace creative structures to promote transparency and better align incentives.

Barclays Capital’s Prime Services conducted extensive, in-depth interviews between December 2008 and March 2009 with approximately 300 investors and 100 hedge fund managers representing $700 billion of hedge fund industry assets, approximately half of the industry. The study also introduced a macro model, created by comparing and triangulating more than 50 public and proprietary sources, to identify which investor types accounted for each element of global flows. The authors of the study used the combination of these two approaches to prioritize investor types for hedge fund asset raising, and as well as to discuss key themes and topics of interest such as investor sentiment in each major investor type, manager fees, managed accounts and cash available for investment.

As a trusted strategic partner, Barclays Capital Prime Services provides clients with best in class solutions to navigate dynamic markets and is actively expanding its business model. The firm offers fully integrated and cross-asset class prime brokerage services and leverages connectivity across businesses to provide clients with a full suite of services including financing, margining solutions, risk management, and award-winning analytics and execution technologies.

Contact: 

Mark Lane
mark.lane@barclayscapital.com
+1 212 412 1413

About Barclays Capital
Barclays Capital is the investment banking division of Barclays Bank PLC. With a distinctive business model, Barclays Capital provides large corporate, government and institutional clients with a full spectrum of solutions to their strategic advisory, financing and risk management needs. Barclays Capital has offices around the world, employs 20,000 people and has the global reach, advisory services and distribution power to meet the needs of issuers and investors worldwide.

For further information about Barclays Capital, please visit our website www.barclayscapital.com.
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