Goldman Sachs

GOLDMAN SACHS

In our 11th Annual Global Hedge Fund Investor Survey conducted earlier this year we gathered information from 545 allocator groups totalling $1.1 trillion of assets directly invested in hedge funds. We asked investors to provide their views on important trends and themes in the 2011 investing environment andanalysed responses to a broad set of questions regarding their hedge fund allocations. Our survey constituents represent a diverse group of hedge fund buyers at institutions and intermediaries across a variety of asset sizes and geographies.

Market conditions and strategy
Allocators expect industry growth of 14% in the next year. Based on current estimates of $1.9 trillion at year end 2010, this implies that assets could reach almost $2.1 trillion by the close of 2011.

In the coming year, survey respondents predict market conditions will be most beneficial for equity long/short, event driven and macro focused strategies.

After credit strategies generated two years of relative outperformance, investors now have a mixed outlook. During 2010, allocators reduced exposure to the strategy from 15% to 11% and plan a further reduction over the next year. Within credit, allocators are rotating out of long-biased distressed products in favour of more trading-oriented and hedged credit strategies.

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Track record and size requirements shifting
Corroborating observations with survey data, we find that allocators are increasingly keen to explore the universe of managers who are considered “emerging” or “undiscovered.” As a result, investors expect to increase their share of allocations to managers with between $500 million and $2 billion under management to 35% in 2011, 3% more than last year.

Liquidity and transparency remain paramount
Confirming that liquidity and transparency remain front of mind with allocators, respondents to this year’s survey expressed a preference for decreasing their allocations to managers’ comingled funds in favour of managed accounts and UCITS products.

Allocators have indicated their intent to allocate 90% of their capital deployments in 2011 to products with lock-ups of one year or less. This further highlights the degree to which funds with less liquid terms are pursuing a diminishing pool of source capital.

Asset and liability alignment
Over the past year, allocators have seen the liquidity of their source capital shift significantly with more than 70% redeemable in less than a quarter, a sizeable increase from just over 50% in 2009.

When asked about the liquidity of their underlying capital relative to their hedge fund investments, allocators broadly seem to be well matched. Institutional investors, despite the longer dated nature of their source capital, generally appear to invest in funds with shorter liquidity profiles.

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II. Portfolio Allocation
A. Strategy Allocation

• At year end 2010, equity long/short strategies continued to represent the largest portion of respondent’s portfolios at 35%, down from a peak of 41% in 2005. Allocations to event driven, global macro, credit and multi-strategy products each represent roughly 10-12% of portfolios.
• Allocations to event driven strategies increased during 2010 by the widest margin, a trend that is expected to continue in 2011. The CTA/managed futures strategy is the only other category to which investors plan to meaningfully increase their exposure in the coming year.
• After several years of increasing allocations to credit strategies, investors significantly reduced exposure in 2010 and plan further reductions in 2011. Investors have also been steadily reducing their allocations to multi-strategy managers since 2007, and based on survey responses, expect to continue this trend in 2011.
• Allocations to global macro products have historically represented a consistently increasing proportion of investors’ portfolios, but are expected to decrease marginally over the next year.
• On average, investors allocate 35% of their portfolios to equity long/short strategies, with family offices representing the high end at 42% and pension plans more diversified with a 21% allocation.
• Endowments and foundations, as well as insurance companies, reduced their exposure to equity long/short managers the most in 2010, shifting allocations to event driven and long only products.
• On further examination of equity long/short allocations by sub-strategy and regional focus, projected 2011 investment levels are largely in line with actual levels from 2010.
• Year over year, capital expected to be invested with fundamental strategies has increased significantly at the expense of trading-oriented managers.

B. Projected changes in strategy allocation

• Credit, multi-strategy and long only are cited by respondents as strategies to which they intend to decrease allocations.
• Across simple and asset weighted averages, event driven and equity long/short strategies are expected to increase as a percentage of allocator portfolios in 2011.
• CTA/managed futures strategies are expected to be the recipients of the greatest percentage reallocation in survey respondents’ portfolios, a trend largely driven by European investors.