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Hedge Fund Pulse

Finding Alpha
Developments in the Equity Hedge Fund Landscape

September 2018

For Institutional Investors Only

Not For Redistribution
This Document Is Not Research
This Document Is Produced
by Barclays Capital Solutions
Group, Not Barclays Research
Department
This Document Does Not
Constitute Legal, Business,
Investment, Accounting or
Tax Advice
See Additional Disclaimer on
Back Cover
Contents
I. Study overview 2

II. Executive summary 2

III. Industry overview 3

IV. Performance analysis 4

V. Portfolio choices and their impact on performance 9

VI. Final considerations 15

VII. Capital Solutions 16

I. Study overview
Equity hedge funds (HF), often considered a ‘core’ hedge fund
strategy, have seen their fair share of ups and downs as the
hedge fund industry has grown and matured. Since the Global
Financial Crisis of 2008 – 2009, unprecedented monetary
easing and rising equity markets have made it difficult for
equity hedge funds to outperform. This has coincided with a
consistent erosion of Equity HFs’ share of industry assets under
management (AUM), driven both by relative performance and
inferior flows. Despite these headwinds, Equity HFs still hold a
sizable portion of the overall industry, currently at just below
half of the total industry AUM. In this paper we take a deep dive
into the evolution and performance of the Equity HF industry
over time, with an eye towards better understanding the key
factors that impact performance, both from an overall market
and portfolio construction perspective.
The three main topics addressed in this study are:
1. Industry overview
a. How has the Equity HF segment of the industry
developed over time? What has been the evolution
of AUM?
b. Which Equity HF sub-strategies are investors currently
allocated to?
c. How have flows into Equity HFs evolved over the past
few years? Which sub-strategies have received inflows
versus outflows?
2. Performance analysis
a. How have Equity HFs performed in various market
environments?
b. Have Equity HFs delivered on their value proposition
over time? What have been some challenges?
c. What are the key market factors impacting
HF performance?
d. Is there persistence in performance for Equity HFs?
3. Portfolio choices and their impact on performance
a. How have certain portfolio management characteristics
such as net and gross exposures, market cap focus, and
portfolio concentration impacted returns?
b. What are some of the strategic choices Equity HFs have
made recently that have led to better performance?
Methodology
The team primarily used three different sources to ensure depth
and breadth of data for our analyses:
1. Conducted a survey in Q2 2018 with 30 Equity HF managers
2. Analysed US equity positions held by Hedge Funds as per
13F Filings provided by Novus1
3. Analysed performance data on over 5,000 funds since 2010
from HFR and HFM
1. Novus is a service provider (unaffiliated with Barclays) that provides industry intelligence to institutional investors and asset managers
2 | For institutional and professional investors only. For information purposes only. Not for further distribution or distribution to retail investors.
II. Executive summary
The following are high level takeaways from the study:
Industry overview
• Equity HFs’ AUM has grown by over 9% annualised since 2000
to ~$1.5 trillion as of Q2 2018; however, their share of the HF
industry has declined from 63% in 2000 to 46% in 2018.
• Equity and non-equity strategies received a similar amount
of inflows in the 2000 – 2007 period ($366bn versus $315bn);
however, since 2010, inflows to equity strategies have
significantly lagged inflows to non-equity strategies
($71bn versus $212bn).
–– Generalist Long / Short HFs were the most challenged in
raising assets: it is the only sub-strategy with net outflows
since 2010.
–– Special Sits and Activists received significant inflows in
the 2010 – 2015 period, but investors’ disappointment
with their performance in 2015 – 2016 led to outflows
amounting to half of the inflows they received in the
2010 – 2015 period.
–– Quant and Merger Arbitrage funds have been receiving
steady inflows since 2016, likely because they maintained
relatively good performance during the HF industry’s
2015 – 2016 drawdown.
• Most investors indicated they expect to maintain or increase
their allocations to Equity HFs over the next 12 months.
–– Quant strategies are still benefiting from a long-term
trend, although recent performance has not been great.
–– Discretionary Long / Short managers will likely be
able to stem the recent outflows given their strong
recent performance.
Performance analysis
• The Equity HF industry has a strong track record, but its
performance has clearly deteriorated since 2010, both in
absolute terms and relative to long-only products.
–– From 2000 – Q2 2018, Equity HF performance has been
good: returns have been 45% higher than the MSCI
World, with roughly half the volatility; alpha generated
(i.e., returns net of beta exposure and risk free rate) has
been 3% on average.
–– However, if we look at the post-2008 crisis period in
isolation, performance has clearly deteriorated: Equity
HFs’ returns have been roughly half the MSCI World
and, more importantly, alpha on average has been only
around 1%.
–– The behaviour of three factors explains a large part
of such alpha deterioration: intra-stock correlation
(the most important), stock return dispersion, and
market directionality.
• Although the average alpha since 2010 has been only
marginally positive, there is significant performance
dispersion across HFs. The key characteristic of the better
performing HFs is that they were able to weather the 2011
and 2015 – 2016 drawdown periods much better than the
average HFs.
• We also found strong evidence of persistence in alpha
generation, which means it is theoretically possible to benefit
from good manager selection. There is limited evidence
supporting persistence of returns (which are influenced by
beta exposure).
Portfolio choices and their impact on performance
• Lower beta appears to help alpha generation: HFs with
lower betas were more likely to be among the top quartile
of alpha producers.
• Leverage benefits Market Neutral HFs, although it
does not appear to be a factor explaining performance for
other strategies.
• ‘Conviction’ positions (positions that are 5% or more of the
HF’s portfolio) contribute more than their fair share to HF
portfolio returns and funds with a larger share of their
portfolio in such positions typically outperform.
• Funds with average holding period below six months had
better performance than funds with longer holding periods.
• In the US only, managers have been able to generate both
more returns and more alpha from mega / large caps versus
mid / small cap (the reverse of what is typically assumed).
That said, specialists in mid / small caps appear to have
generated more alpha.
• A quarter of managers in our sample had more than 50%
of their portfolio in ‘crowded’ positions. Such managers had
significantly lower returns over the past five years.
• From a risk management perspective, some mechanisms
(e.g., market neutrality and use of tail protection) seem to
help reduce potential drawdown much better than others
(e.g., reducing leverage / gross).
III. Industry overview
We begin our analysis by looking at how the AUM of Equity HFs
has evolved over the years, looking at its growth compared to
the overall HF industry, and how this breaks down by sub-
strategy. We found that, while Equity HFs have historically
accounted for the majority of industry assets, their share has
been diminishing, mostly due to net outflows since 2007.
Hedge Fund industry assets
The historical snapshot of the overall HF industry and the asset
levels for Equity HFs can be seen in Figure 1. In 1999, Equity HFs
held 63% of the total industry AUM, but by Q2 2018 their share
had declined to 46%. Equity HF AUM is concentrated in the top
sub-strategies – approximately half are held by Generalist Long
/ Short funds and a third by Special Situations / Activist funds.
The remainder is spread between Sector Focused funds, Merger
Arbitrage funds, and Quant funds. It is worth noting that while
Quant HFs currently manage only 9% of the equity HF assets,
their share has been increasing significantly over the last
several years (i.e., since 2012) as investors have become more
comfortable with the strategy.
Equity Hedge Fund sub-strategies
As mentioned, Equity HFs’ share of industry assets declined
from 63% to 46% from 1999 to Q2 2018, which was mostly
due to performance through 2007. Since then, the fall has been
driven largely by investor outflows. The left hand side of Figure
2 shows the industry flows for Equity and Non-Equity strategies
since 2000. Equity HFs received $315 billion in inflows from
2000 – 2007 period, but since 2008 they have experienced net
outflows of $71 billion – compared to net inflows of almost the
same amount for Non-Equity strategies. Furthermore, since
2016, when the industry has had outflows overall, virtually

FIGURE 1: HF Industry Assets

Total Industry AUM ($bn) Equity HF AUM by Sub-Strategy ($bn) – Q2 2018
CAGR
456 1,868 1,600 3,236 11% Generalist
47% 704
Long / Short

Long / Short
32% 31% 35%
Other1 39%
(144) (582) (561) 12% Sector
(1,254) 8% 117
Focused
Multi- 5%
Strategy (25) 15%
(285) 15% Special Sits /
(242) 15% 34% 510
18% Activist
(498)
Event

Merger
63% 2% 25
Equity 54% Arbitrage
(287) 50%
(1,001) 46%
(797) 9%
(1,483)
Quant

Quant 9% 127

1999 2007 2009 Q2 2018

Source: HFR, Strategic Consulting analysis. Any past or simulated past performance (including back-testing) contained herein is no indication as to future performance. For Professional and Institutional
Investors only. Not for further distribution or distribution to Retail Investors
1. ‘Other’ is composed mostly of macro (discretionary and systematic, incl. CTA) and credit / distressed strategies

Capital Solutions – Hedge Fund Pulse, September 2018 | 3

all of the outflows have been from Equity HF strategies. Of
the various Equity HF sub-strategies, Generalist Long / Short
appears to be the most challenged – it is the only sub-strategy
that has had net outflows since 2010. Special Situations and
Activists received $60 billion in inflows in the 2010 – 2015
period, but saw almost half of their 2010 – 2015 inflows pulled
out by investors, likely due to their disappointing performance
in 2015 – 2016. Quant and Merger Arbitrage funds are the two
bright spots as they have received steady inflows since 2010,
which is most likely due to their strong performance relative to
the other Equity HF sub-strategies.
IV. Performance analysis
We now look at how Equity HFs have performed over time.
Specifically, we examine their performance compared to relevant
benchmarks, especially around their ability to generate alpha,
the consistency at which they are able to generate alpha, and the
market conditions that are most conducive to generating alpha.
Equity HF returns versus Equity market returns
While Equity HFs have outperformed the MSCI World since
2000, they have underperformed in more recent periods, as seen
in Figure 3. Since 2000, Equity HFs returned 5.8% versus 4.0%
of the MSCI World, which compares quite favourably to the ratio
since 2010 of 5.2% versus 9.4%. Since Q2 2016, Equity HFs have
made up some of the ground, but still fall short of the broader

FIGURE 2: HF Industry Flows

Total Industry Flows ($bn) Net Flows 2010 – 20151 ($bn) Net Flows 2016 – Q2 20181 ($bn)

366
315 Generalist
12% 47 (50) (8%)
Long / Short
217
Sector
8% 4 (3) (3%)
128 Focused

Special Sits /
22% 60 (31) (7%)
Activist

(5)
(57) Merger Arb 20% 3 17% 3

(142) (144)
2000 – 2007 2008 – 2009 2010 – 2015 2016 – Q2 2018 Quant 30% 13 28% 24
Equity Non-Equity

Source: HFR, Strategic Consulting Analysis. Any past or simulated past performance (including back-testing) contained herein is no indication as to future performance. For Professional and Institutional
Investors only. Not for further distribution or distribution to Retail Investors
1. Percentage shown is of the Initial AUM for that strategy

FIGURE 3: Equity HF Returns vs. Equity Market Returns

Performance Comparison between Equity HFs vs. MSCI World (2000 – Q1 2018)

Since 2000 Since 2010 Since Q2 2016

Annualised Return

(29%)
14.2%
(45%)
45% 9.4% 10.1%
5.8% 5.2%
4.0%

MSCI World Equity HFs MSCI World Equity HFs MSCI World Equity HFs

Since 2000 Since 2010 Since Q2 2016

Annualised Volatility

(52%)
15.1% (55%)
13.0%
(59%)
7.3% 7.1%
5.9%
2.9%

MSCI World Equity HFs MSCI World Equity HFs MSCI World Equity HFs

Source: MSCI World, HFR, Strategic Consulting Analysis. Any past or simulated past performance (including back-testing) contained herein is no indication as to future performance. For Professional and
Institutional Investors only. Not for further distribution or distribution to Retail Investors

4 | For institutional and professional investors only. For information purposes only. Not for further distribution or distribution to retail investors.
market (i.e., and 10.1% versus 14.2%). The equity market rally
since 2010 has made it difficult for HFs to keep up, although they
have shown improvement since the last industry drawdown of
2015 – 2016, even against the backdrop of a continuing equity
bull market. That said, it is worth noting that Equity HFs have
consistently displayed lower volatility than the equity markets,
hovering between 50% – 60% lower than the MSCI World
depending on the time period, which results in better Sharpe
ratios for Equity HFs throughout.
Equity HF alpha
The easiest way to look at Equity HFs’ performance is to compare
it to market returns over time. As one would expect, Equity
HFs have both beaten and fallen short of the overall market in
different time frames. However, a more appropriate metric to
assess HFs is to measure their ability to generate alpha – the
portion of HF returns that cannot be attributed to the broader
market and cannot be replicated (cheaply) by a portfolio of
market instruments. Figure 4 shows that Equity HFs have
generated roughly 3% of alpha since 2000, though it has fallen
to only 1.1% since 2010. If we look at the other metrics, the
correlation of Equity HF monthly returns to the MSCI World has
been pretty consistent over time (i.e., 84% since 2000 and 90%
since 2010). The average beta has stayed consistent, regardless of
the period, at 41%.
The 3% annualised alpha since 2000, although seemingly
trivial, would make a relatively attractive theoretical return
profile when modelling Equity HFs against the MSCI World (as
shown in Figure 4). According to our theoretical model, Equity

FIGURE 4: Equity HF Alpha

Monthly Equity HF Returns vs. MSCI World (2000 – Q1 2018) Monthly Equity HF Returns vs. MSCI World (2010 – Q1 2018)

HF Returns = 3% + 41% * MSCI World + 59% * 3M Libor HF Returns = 1.1% + 41% * MSCI World + 59% * 3M Libor
10 5
Actual Returns

5
(10) (8) (6) (4) (2) 2 4 6 8 10 12
(20) (15) (10) (5) 5 10 15 20 (5)
(5)
Correlation: 84% Correlation: 90%
(10) (10)
Theoretical BR Returns

10% 10%
8%
4% 5% 6% 5% 4% 5%
2%
0% 0% 0% 1%
(1%)
(3%)
(5%) (5%)
(10%) (10%)

MSCI Return Equity HF Expected Return

Source: MSCI World, HFR, Strategic Consulting Analysis. Any past or simulated past performance (including back-testing) contained herein is no indication as to future performance. For Professional and
Institutional Investors only. Not for further distribution or distribution to Retail Investors

FIGURE 5: Equity HF Alpha over Time

12-Month Rolling Equity HF Alpha

15 2001 – Q1 2018:
3.0%
2000 – 2007: 2010 – Q1 2018:
5.3% 1.1%
10

0
Alpha
Revival
(5) Q1 2016 –
Q1 2018:
3.7%
(10)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: HFR, Barclays Strategic Consulting analysis. Any past or simulated past performance (including back-testing) contained herein is no indication as to future performance. For Professional and
Institutional Investors only. Not for further distribution or distribution to Retail Investors
Methodology: Alpha is calculated as Equity HF Returns – [3M Libor + Beta to MSCI * (MSCI – 3M Libor)]

Capital Solutions – Hedge Fund Pulse, September 2018 | 5

HFs would do a good job protecting against the downside (i.e.,
capture 0% of a 10% drop in the MSCI World) while capturing a
significant portion of the upside (i.e., capture 80% of a 10% rise
in MSCI World return). However, the reality is that the 3% alpha
has not been stable over time and is typically much lower when
the equity markets are down.
Equity HF alpha over time
As mentioned previously, Equity HFs have generated positive
alpha both since 2000 and since 2010. Figure 5 shows the level
of alpha that Equity HFs were able to generate on a 12-month
rolling basis since 2000. The 2000 – 2007 period saw the
highest level of alpha generation at 5.3% and the post-Global
Financial Crisis period (from 2010 – Q1 2018) has seen more
erratic alpha generation, resulting in average alpha of just 1.1%.
Although generally alpha has been positive since 2000, there
were three concentrated periods of negative alpha – the Global
Financial Crisis of ’08 – ’09, the Eurozone Crisis of ’11 – ’12, and
the HF Drawdown period of ’15 – ’16. However, the recovery from
the most recent drawdown period has been particularly strong:
HFs have managed to deliver annualised alpha of 3.7% from
March 2016 through Q1 2018.
Equity HF alpha drivers
Although there are myriad market factors that impact Equity
HFs’ ability to generate alpha, we’ve found three to be the
most compelling: intra-stock correlation, market direction, and
dispersion. The left side of Figure 6 shows the effects these

FIGURE 6: Equity HF Alpha Drivers

Three Key Market Drivers of HF Alpha1 Alpha Driver Index2 vs. Equity HF 12-Month Rolling Alpha
15 10
5.6% ‘Alpha Driver Index’ (RHS) Alpha (LHS)
5.8%
9
Intra-Stock
Correlation 0.2% 10 8
High Low
7

5 6
2.4% 4.4%
Market 2.0% 5
Direction
0 4
Down Up
3

1% (5) 2
3.0% 4.0%
Dispersion 1
Low High (10) 0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Source: S&P 500, HFR, Strategic Consulting Analysis. Any past or simulated past performance (including back-testing) contained herein is no indication as to future performance. For Professional and
Institutional Investors only. Not for further distribution or distribution to Retail Investors
1. Intra-stock correlation measures the extent to which the returns of S&P 500 index constituents are moving up or down in tandem with each other; Market Direction refers to whether the S&P 500
index returns are going up or down, and Dispersion measures the performance gap between S&P 500 index constituents; 2. The ‘Alpha Driver Index’ is a blended index that tracks how conducive the
market environment (intra-stock correlation, market direction, dispersion) is for HF alpha generation

FIGURE 7: Impact of Intra-Stock Correlation

Alpha Equity HF in Different Market Environments

Overall In High Correlation Environments In Low Correlation Environments

1.1%
2.2%
0.5%
6.1%
Market 4.4% 5.0%
Direction 0.4%
2.0%
(0.1%)
Down Up Down Up Down Up

3.7%
1.0% (2.0%)
7.7%
Dispersion 1.3%
4.0% 4.0%
3.0%
(0.7%)
Low High Low High Low High

Source: S&P 500, HFR, Strategic Consulting Analysis. Any past or simulated past performance (including back-testing) contained herein is no indication as to future performance. For Professional and
Institutional Investors only. Not for further distribution or distribution to Retail Investors

6 | For institutional and professional investors only. For information purposes only. Not for further distribution or distribution to retail investors.
individual market conditions have had on alpha generation
since 2000. When the movements of stocks in the S&P 500 have
low correlation to each other, Equity HFs on average generate 5.8%
alpha versus 0.2% in high correlation environments. When the
equity markets are up, Equity HFs on average generate 4.4% alpha
versus 2.0% in down markets. Finally, when the performance gap
between the top performing stocks and the bottom performing
stocks is high, Equity HFs on average generate 4.0% of alpha
versus 3.0% when dispersion is low.
In order to better understand what might be causing the
variation in Equity HFs’ performance, we created an ‘Alpha
Driver Index’ (right side of Figure 6), which combines the three
aforementioned factors into one chart. We wanted to show
the ‘favourability’ of the combined market factors (i.e., how
conducive the market factors are for alpha generation) over
time in order to explain why Equity HFs’ ability to generate
alpha has apparently eroded. The Alpha Driver Index closely
tracks the amount of alpha generated over time, with the
exception of the financial crisis, which suggests that there were
other factors in play at that time (e.g., the liquidity crunch).
Impact of intra-stock correlation
Of the three market factors just discussed, intra-stock
correlation seems to have the largest impact on Equity HFs’
ability to generate alpha. Figure 7 shows the effects of the
other two factors, market direction and dispersion, corrected
for high and low correlation environments. We can see that the

FIGURE 8: Equity HF Alpha by Sub-Strategy

β Equity Sub-Strategy Performance since 2010 Performance Post Q1 2016 (post market drawdown)

0.41 Total Equity 4.1% 1.1% 5.2% 7.7% 3.7% 11.4%

Long / Short

0.59 Generalist (0.9%) 5.8% 4.9% 10.6% 3.6% 14.2%

0.51 Sector 5.0% 1.0% 6.0% 9.3% 4.0% 13.3%

Quant

1.1% 3.7% 0.8%

0.23 Quant 5.7%
2.6% 4.9%

Special Sits /
0.44 4.4% 1.9% 6.3% 8.3% 4.8% 13.1%
Activist
Event

0.10 Merger Arbitrage 1.7% 2.9% 3.9%

3.2%
1.5%
1.0%
Beta Alpha
Source: MSCI World, HFR, Strategic Consulting Analysis. Any past or simulated past performance (including back-testing) contained herein is no indication as to future performance. For Professional and
Institutional Investors only. Not for further distribution or distribution to Retail Investors

FIGURE 9: Equity HF Alpha by Geographical Focus

Returns, Alpha and Beta by Geographical Exposure 2010 – Q1 2018

Benchmark Global Benchmark US

8.4%
6.6%
MSCI World S&P 500
Beta = 48% 2.9% Beta = 49%
1.3%

Returns Alpha Returns Alpha

Benchmark Europe Benchmark Asia

8.5%

5.6% 5.6%
MSCI Europe 3.8% MSCI AC Asia
Beta = 34% Beta = 52%

Returns Alpha Returns Alpha

Source: Bloomberg, HFM, Strategic Consulting Analysis. Any past or simulated past performance (including back-testing) contained herein is no indication as to future performance. For Professional and
Institutional Investors only. Not for further distribution or distribution to Retail Investors
Methodology: Sample of ~700 funds with a track record from January 2010 – March 2018. Alpha is calculated as Equity HF Returns – [3M Libor + Beta to benchmark * (benchmark – 3M Libor)]

Capital Solutions – Hedge Fund Pulse, September 2018 | 7

difference in alpha generated in up and down markets (2.2%) is
minimised once corrected for high (to 0.5%) and low correlation
environments (to 1.1%). It seems that while market direction
does indeed have an impact, the numbers are skewed by the
fact that 71% of the up markets are low correlation months
versus only 41% of down markets. Dispersion seems to act
somewhat as leverage and stresses the effects of a positive (low
correlation) or negative (high correlation) market environments.
The real sweet spot for alpha is a low correlation and high
dispersion environment, as HFs generated an average of 7.7%
in these conditions since 2000.
Equity HF alpha by sub-strategy
Shifting to performance by specific sub-strategies, Figure 8
looks at returns, alpha, and beta since 2010. When looking at
the period since 2010, overall Equity HFs’ alpha was 1.1% with
4.1% beta. By sub-strategy, however, there was significant
dispersion – Generalists had the lowest alpha at (0.9%), while
Special Sits / Activists had the highest alpha at 1.9%. However,
when looking at the most recent recovery period since the equity
market drawdown, which ended in Q1 2016, Equity HFs have
performed significantly better with returns averaging 11.4%,
of which 3.7% was alpha. During this period, Special Sits /
Activists continued to lead the pack in alpha generation, followed
by Sector and Generalists. It is worth noting the rebound of
Generalists, which generated 3.6% alpha during this period.
Merger Arbitrage and Quant, however, fell behind considerably.
Equity HF alpha by geographical focus
Next we look at Equity HF alpha by geography (Figure 9).
Using a sample of ~700 Equity HFs, we categorised each fund
by region of investment focus: US, Europe, and Asia. We then
calculated alpha against the relevant benchmarks: S&P 500 for
US, MSCI Europe for Europe, and MSCI AC Asia for Asia. We
found that those focusing on Asian equity markets appear to
have performed the best both on an absolute basis and on an
alpha generation basis, with 8.5% returns and 5.6% alpha since
2010. Europe-focused funds had the worst absolute returns at
5.6%, but strong alpha generation at 3.8%. US-focused funds
performed well on an absolute basis but had the lowest alpha,
with 8.4% returns and 1.3% alpha.
FIGURE 10: Distribution of HFs by Alpha Generated
2010 – Q1 2018 Annualised Alpha, Frequency Distribution1
Negative Alpha
Σ=2,486 Funds (46%)
Median: (3.8%)
Standard Deviation:
7.6%
<(25%)
(20%)
(15%)
Dead Funds: Negative α
Source: HFR, Strategic Consulting analysis. Any past or simulated past performance (including back-testing) contained herein is no indication as to future performance. For Professional and Institutional
Investors only. Not for further distribution or distribution to Retail Investors
1. Sample includes 5,445 Equity HFs with at least three years of performance data from 2010 through Q1 2018
8 | For institutional and professional investors only. For information purposes only. Not for further distribution or distribution to retail investors.
Distribution of HFs by alpha generated
So far we have looked at Equity HFs collectively, so we will
now take a deep dive into the performance of individual funds.
Figure 10 shows the frequency distribution of alpha across
5,445 funds with at least three years of performance, including
both existing and closed funds, since 2010. During this period,
54% of funds generated positive alpha and 46% generated
negative alpha; the median was 3.8% for funds with positive
alpha, (3.8%) for funds with negative alpha, and the standard
deviation was 7.6% across all. As expected, the distribution
of alpha generation is positively skewed for existing funds
and negatively skewed for closed funds. Figure 11 shows
the difference in annualised performance between HFs that
generated positive and negative alpha since 2010. What is clear
is that there is significant dispersion of performance between
the top and bottom performers; an investor would have
benefited from 8.6% higher annualised returns on average by
selecting those funds that generated positive alpha as opposed
to those that generated negative alpha. The dispersion also
appears to be particularly high during drawdown periods, as we
can see from the substantial difference in performance during
the 2011 and 2015 drawdowns (13.7% and 19.4%, respectively).
Evidence of HF alpha persistence
The importance of manager selection naturally begs the question
of how to differentiate the top performers from the bottom
performers. In line with academic research looking into
the existence of performance persistence among HFs, our
findings suggest a lack of persistence in HF returns due to the
significant impact of broader market conditions (not shown).
However, once we distill alpha from beta, we find evidence
of persistence in manager skill over time (i.e., persistence in
alpha). Figure 12 shows the same analysis from two datasets
for robustness, with the left hand side using data from the HFR
(~443 Equity HFs) and the right hand side using data from the
HFM (~981 Equity HFs). Using a three-year lookback period,
we ranked the HFs into quartiles (by alpha); subsequently, we
measured the likelihood of an HF that was ranked in the top or
bottom quartile during the lookback period remaining in the
same quartile in the following period. On average, 38% of HFs
Positive Alpha
Σ=2,959 Funds (54%)
Median: 3.8%
(10%)
(5%)
0%
5%
10%
15%
20%
> 25%
Existing Funds: Negative α Dead Funds: Positive α Existing Funds: Positive α
which ranked in the top quartile in both samples remained in
the top quartile. In addition, 37% of HFs ranked in the bottom
quartile remained in the bottom quartile. Based on our findings,
an investor who picks funds that were top quartile alpha
generators in the previous three years can expect to receive an
uplift of around 1.5% in alpha generation compared to a passive
portfolio of HFs, while eliminating funds in the bottom quartile
in the previous three years would instead give an alpha pickup
of 0.3% – 0.5% (not shown).
V. Portfolio choices and their
impact on performance
We now turn our attention to the portfolio choices that HFs
make, and how these choices affect performance. We examine
various factors such as beta exposure, leverage, portfolio
concentration, holding period, market cap exposure, etc. to
better understand the types of levers HFs are pulling and how
these affect returns as well as alpha. In essence, keeping in
mind that there seems to be alpha persistence, we strive to
understand what separates the best performing Equity HFs.

FIGURE 11: Performance Dispersion

Difference in Annualised Performance between HFs that Generated Positive vs. Negative Alpha since 20101

19.4%

13.7%

8.6%
7.2%

2010 – Q1 2018 2011 Drawdown H2 2015 Drawdown 2010 – Q1 2018

(Eurozone Crisis) (excluding drawdowns)

Drawdown Periods

Source: HFR, Strategic Consulting analysis. Any past or simulated past performance (including back-testing) contained herein is no indication as to future performance. For Professional and Institutional
Investors only. Not for further distribution or distribution to Retail Investors
1. Sample includes 2,664 Equity HFs (excluding dead funds) with at least three years of performance data from 2010 through Q1 2018

FIGURE 12: Evidence of HF Alpha Persistence

% of HFs Remaining in Same Quartile as Previous Three Years

Sample from HFR Database1 Sample from HFI Database 2

45% 46%
42% 41% 43% 43%
41% 40%

33% 34% 33%

30%
27% 28%
25% 25%
‘Random ‘Random
Draw’ Draw’

2013 – 2015 2014 – 2016 2015 – 2017 2012 – 2014 2013 – 2015 2014 – 2016 2015 – 2017
Started out as and stayed in Top Quartile Started out as and stayed in Bottom Quartile

Source: HFR, Strategic Consulting Analysis. Any past or simulated past performance (including back-testing) contained herein is no indication as to future performance. For Professional and Institutional
Investors only. Not for further distribution or distribution to Retail Investors
Alpha is calculated as HF Returns – [3M Libor + Beta to MSCI * (MSCI – 3M Libor)]
1. Sample includes 443 Equity HFs with AUM greater than $100mn (as of YE 2017) and monthly performance data from 2010 onwards
2. Sample includes 981 Equity HFs with AUM greater than $100mn and at least three full years of performance between 2009 and 2017

Capital Solutions – Hedge Fund Pulse, September 2018 | 9

Beta exposure
We begin by looking at beta exposure. We looked at 443 Equity
HFs with AUM over $100 million, and monthly performance
data going back to 2010. On the left hand side of Figure
13, we see that, on average, HFs that generated the most
alpha had the lowest betas. The top quartile generated 9.8%
alpha and had 0.30 beta, while the bottom quartile generated
(2.4%) alpha and had 0.68 beta. In the middle of Figure 13, we
grouped the funds by average beta exposure and determined
the percentage of funds in each category that fell into each
alpha quartile. We categorised beta exposure as follows: <0.2 as
low net, 0.2 – 0.5 as directional, and 0.5+ as long biased. Among
the low net funds, a disproportionately high percentage fell into
the top alpha quartile and a disproportionately low percentage
fell into the bottom alpha quartile compared to a random
draw of 25% in each quartile. On the right hand side of Figure
13, we looked to see if changing beta over time (i.e., proxy for
market timing) helps managers generate alpha on average. We
found the impact to be de minimis, though it does create more
variability in alpha, pushing funds into either the top or bottom
alpha quartiles.

FIGURE 13: Beta Exposure

Beta Exposure by Alpha Quartile (2010 – 2017) Alpha Quartile by Beta Exposure (2010 – 2017) Alpha Quartile by Change in Beta

# of HFs: 143 123 177 # of HFs: 237 206

16% 22%
34% 28% 29%
18%
28% 20%
25% 33% 24%
0.68 50% 50%
21%
29%
0.36 0.41 27% 25%
0.30 42%
30%
21%
14% 14%

Top α Second α Third α Bottom α β < 0.2 0.2 < β < 0.5 β > 0.5 ∆ β < 0.15 ∆ β > 0.15
Quartile Quartile Quartile Quartile Low Net Directional Long Biased
Avg. α: 9.8% 4.3% 2.1% (2.4%) 4.7% 4.5% 1.7% 3.6% 3.2%

Top α Quartile Second α Quartile Third α Quartile Bottom α Quartile

Source: HFR, Strategic Consulting Analysis. Any past or simulated past performance (including back-testing) contained herein is no indication as to future performance. For Professional and Institutional
Investors only. Not for further distribution or distribution to Retail Investors
Sample includes 443 Equity HFs with AUM greater than $100mn (as of YE 2017) and monthly performance data from 2010 onwards. Alpha is calculated as HF Returns – [3M Libor + Beta to MSCI * (MSCI
– 3M Libor)]. Change in Beta refers to the difference (in absolute terms) between a fund’s beta to the MSCI during the 2010 – 2013 period and its beta to the MSCI during the 2014 – 2017 period

FIGURE 14: Gross Exposure

Distribution of HF Sample by Average Gross / Net Exposure (%)
70
Long Biased
60
Trad. L / S
Average Net Exposure (%)

50 Market Neutral

40

30

20

10

(10)
0 50 100 150 200 250 300 350 400 450 500
Average Gross Exposure (%)
Source: All figures refer to Strategic Consulting survey results only. Survey / interviews were conducted in Q2 2018. The results presented are from a relatively small number of respondents and therefore are
indicative only and not meant to reflect conclusive industry trends. Data and other information presented are derived directly from respondents and we cannot confirm the accuracy of such information.
Any past or simulated past performance (including back-testing) contained herein is no indication as to future performance. For Professional and Institutional Investors only. Not for further distribution
or distribution to Retail Investors

10 | For institutional and professional investors only. For information purposes only. Not for further distribution or distribution to retail investors.
Leverage
We next examine leverage and its effects on returns.
Figure 14 shows the breakdown of our HF respondents by
gross / net exposure. Those with a high gross / low net are
market neutral, mid gross / mid net are traditional Long /
Short, and low gross / high net are long biased. In Figure 15, we
look at each category and compare the returns and exposure
ranges between high and low gross funds. Market neutral HFs
appear to have the most significant differences in their ranges
of net and gross exposures, which seems to culminate in the
widest range for their returns. Low gross market neutral HFs on
average have 139% gross and 12% net with 5.2% returns,
while high gross market neutral HFs on average have 308%
gross and 7% net with 8.7% returns. On the other hand,
traditional Long / Short and long-biased HFs appear to get
very little benefit from greater leverage. Long-biased HFs only
gain 0.7% in returns, while traditional equity Long / Short
actually seem to be destroying value with increased leverage,
losing 0.9% in returns going from low gross to high gross
exposure. While leverage is one of the defining aspects of
what differentiates an HF from other alternative investment
vehicles, only a specific type of Equity HF seems to be able to
effectively capitalise on its benefits.

FIGURE 15: Gross Exposure

Average Annual Returns Based on Avg. Gross Exposure (2013 – Q1 2018)1

0.7%
(0.9%)
3.5%
9.5% 9.8%
8.7% 9.1%
8.6%

5.2%

Mkt Neutral Trad L / S Long Biased

Exposure
Average

Gross 139% 308% 111% 185% 107% 168%

Net 12% 7% 38% 37% 66% 58%

Low Gross High Gross

Source: All figures refer to Strategic Consulting survey results only. Survey / interviews were conducted in Q2 2018. The results presented are from a relatively small number of respondents and therefore are
indicative only and not meant to reflect conclusive industry trends. Data and other information presented are derived directly from respondents and we cannot confirm the accuracy of such information.
Any past or simulated past performance (including back-testing) contained herein is no indication as to future performance. For Professional and Institutional Investors only. Not for further distribution
or distribution to Retail Investors
1. HFs in each category were split evenly between ‘high’ and ‘low’ gross exposure, based on the median gross exposure

FIGURE 16: Conviction Positions

Returns by % of Portfolio in 5%+ Positions (2013 – 2017) 5%+ Position Exposure vs. Contribution (2013 – 2017)

Diversified Concentrated

18% 7%
17%
16%
13% 22%

25% 93%
14% 85% 86%
11% 12% 62% 63%
10%
8%
37%
8% 16%
25% or less 26% – 50% 51% – 75% >76% Exp. Contr. Exp. Contr. Exp. Contr. Exp. Contr.
% of 40% 24% 22% 14% 25% or less 26% – 50% 51% – 75% >76%
Sample
Avg. # of 1.2 5 7.4 7.9
5%+ Positions

Average Return Volatility

Source: Strategic Consulting Analysis based on Novus Data from 140 managers. Any past or simulated past performance (including back-testing) contained herein is no indication as to future performance.
For Professional and Institutional Investors only. Not for further distribution or distribution to Retail Investors

Capital Solutions – Hedge Fund Pulse, September 2018 | 11

Conviction positions
In our conversations with investors, we sought to identify
common drivers of alpha and we found that there was the
most consensus around two: stock selection and position
sizing. There was also a preference towards HFs who commit
to their best ideas (i.e., put their money where their mouth
is), as that’s what was perceived as the ultimate alpha driver.
To see if this sentiment bore fruit, we looked at long positions
that constituted 5% or more of the long book portfolio across
140 managers. On the left hand side of Figure 16, we looked
at annualised returns by percentage of long portfolio in 5%+
positions (i.e., the percentage of an HF’s book in their ‘best idea’
positions). HFs that had a higher exposure to 5%+ positions
had higher returns, though when concentration increased to
>75%, the volatility went up and returns diminished marginally.
On the right hand side of Figure 16, we compared the average
portfolio exposure to the 5%+ positions and the percentage of
total returns the 5%+ positions generated. Across the board,
we see that the 5%+ positions contributed more than their fair
share of returns, with the effect most pronounced for HFs with
26% – 50%, and 51% – 75% of their portfolios in 5%+ positions.
It seems the HFs that commit to their ‘best ideas’ perform better,
and the 5%+ positions are strong contributors to overall returns.

FIGURE 17: Average Holding Period

Average Holding Period – Frequency Average Holding Period by HF Type – Number of Months

61% 16
15
14
13
12
39%
9
30% 30%

22%
17%

<6 mos 6 – 12 mos >12 mos Long Biased Trad HF Mkt Neutral
Avg. Returns 9.3% 8.9% 7.3% 7.8% 7.7% 6.8%
Avg. Long Positions Avg. Short Positions
Avg. Volatility 8.5% 8.8% 8.6% 9.1% 11.3% 13.3%
Source: All figures refer to Strategic Consulting survey results only. Survey / interviews were conducted in Q2 2018. The results presented are from a relatively small number of respondents and therefore are
indicative only and not meant to reflect conclusive industry trends. Data and other information presented are derived directly from respondents and we cannot confirm the accuracy of such information.
Any past or simulated past performance (including back-testing) contained herein is no indication as to future performance. For Professional and Institutional Investors only. Not for further distribution
or distribution to Retail Investors

FIGURE 18: Market Cap Exposure

Proportion of (Long / Short) Book by Market Cap

US Funds European Funds

Market
Cap Bucket
10%
Mega (>$50bn) 25% 23% 18%

38%
28%
39%
Large ($10 – $50bn) 41%
50%
30%
39%
Mid ($2 – $10bn) 24% 28%
24%
Small (<$2bn) 10% 10% 13%
Long Short Long Short
Source: All figures refer to Strategic Consulting survey results only. Survey / interviews were conducted in Q2 2018. The results presented are from a relatively small number of respondents and therefore are
indicative only and not meant to reflect conclusive industry trends. Data and other information presented are derived directly from respondents and we cannot confirm the accuracy of such information.
Any past or simulated past performance (including back-testing) contained herein is no indication as to future performance. For Professional and Institutional Investors only. Not for further distribution
or distribution to Retail Investors

12 | For institutional and professional investors only. For information purposes only. Not for further distribution or distribution to retail investors.
Average holding period
Transitioning back to the 30 HF respondents, we looked at the
average holding periods of both long and short positions and if
this differentiated returns. On the left hand side of Figure 17, we
found that funds that have shorter holding periods had better
performance over the past five years. HFs that had holding
periods of under six months for both long and short positions
had the best returns and the lowest volatility for both sides,
with returns of 9.3% on long and 8.9% on shorts, and volatility
of 8.5% and 8.8%, respectively.
The right hand side of Figure 17 shows the average holding
periods of long and short position by HF type. With the
exception of market neutral HFs, most HFs hold their longs for
a considerably longer period (one to two quarters) than their
shorts. Approximately 75% of HFs indicated that they have not
changed the holding periods of their Long / Short positions
over the last two years (not shown).
Market cap exposure
We also looked at the market cap exposure of the long and short
books, seen in Figure 18, and we see a significant difference
between US managers (shown on left) and European managers
(shown on right). US managers have a total of 60%+ exposure
to large / mega cap positions on both long and short positions,
while European managers hover in the high 40%s exposure to
large / mega cap positions on both long and short positions. This
is partly due to a larger number of large / mega cap stocks in the
US. More interestingly, we see that US HFs have greater exposure
to small / mid cap on the short side compared to the long –
this is probably due to the fact that the size premium in the US
market over the past five years was inverted (i.e., large caps have
returned more than small cap), while it has remained positive for
Europe (and Japan).
FIGURE 19: US Long Portfolio Market Cap Exposure and Alpha
HF Exposure by Market Cap1 Alpha2 by Market Cap (2013 – 2017)
22% 8%
Mega
30%
30% 3%
Large
33%
31%
Mid
27% (4%)
Small / 17%
Micro 10% (7%) (7.2%)
2008 – 2012 2013 – 2017
Source: Novus Overall Equity Data, Novus Data from 140 managers, Strategic Consulting Analysis. Any past or simulated past performance (including back-testing) contained herein is no indication as to
future performance. For Professional and Institutional Investors only. Not for further distribution or distribution to Retail Investors
1. Market Cap categories are as follows – Micro (<$250mn), Small ($250mn – $2bn), Mid ($2 – $10bn), Large ($10 – $50bn) and Mega ($50+bn); 2. Indices used are Russell Top 50 Mega Cap for Mega
Cap, S&P 500 for Large Cap, Russell Midcap for Mid Cap, and a blend of Russell 2000 and Russell Microcap for SMID; 3. SMID Cap includes Micro Cap, Small Cap, and Mid Cap
US long portfolio market cap exposure and alpha
Looking specifically at the long book of US managers, we find a
few interesting trends. On the left hand side of Figure 19, we see
the evolution of exposure by market cap. From 2008 – 2012,
large / mega cap totaled 52% exposure, while SMID cap totaled
47% exposure. From 2013 – 2017, the large / mega cap exposure
increased to 63%, while SMID cap exposure decreased to 37%.
The biggest movements came from the two extreme ends –
mega cap gained 8% exposure, while small and micro cap lost
7% exposure. This growth in large / mega cap has been driven
primarily by the availability of alpha, as seen in the middle
of Figure 19. Positions in large / mega cap stocks generated
positive alpha, while mid and small / micro cap saw negative
alpha generation. However, it is important to note that HFs are
still overweight SMID cap compared to the broader market –
as of YE 2017, the Russell 3000 was 17% SMID cap and
83% large / mega cap.
Despite this macro movement towards large / mega cap, a
common theme we hear in our conversations with investors
and managers is that there is still alpha generation in SMID cap
positions. To this end, we turned to our Novus sample of 140
managers and looked at those that focused on SMID cap (i.e.,
70%+ exposure), shown on the right hand side of Figure 19.
These HFs were generally smaller, an average of $1bn in their
long book, and actually generated a positive alpha of 2.3% during
the 2013 – 2017 period. This suggests that smaller, more nimble
managers are still able to generate alpha in SMID cap positions
despite that not being the case for the overall HF industry.
Crowded positions
Another common theme discussed in the industry has been
crowded positions – i.e., positions that are popular among HFs
and therefore are potentially overbought. In general, investors
that we’ve spoken to generally viewed crowded positions as
Manager Alpha by Portfolio Market Cap Exposure (2013 – 2017)
1.2%
2.0%
(0.5%)
(1.2%)
(1.4%)
Exposure >70% <70%
to SMID Cap3
% of Sample 26% 74%
% of AUM 8% 92%
Avg. SMID 87% 39%
Cap Exposure
Capital Solutions – Hedge Fund Pulse, September 2018 | 13
less of a concern due to the belief that HFs are doing the proper
research and analysis before investing. However, many investors
noted that this was something they kept an eye on to make sure
the investors themselves weren’t overexposed to any particular
position or sector. To better understand how exposure to
crowded positions affect manager returns, we turned to the
Novus data set of 140 HFs.
Novus defines and measures crowdedness as a mix of two
factors – the number of managers invested in the stock, and
the liquidity of each position. Based on this mix of ‘popularity’
and ‘illiquidity’, they assign each position a score of 0 to 1,
with 1 being the most crowded. The left hand side of Figure 20
shows the exposure and return contribution breakdown of
three crowdedness categories: ‘niche’ (<0.6), ‘vanilla’ (0.6 –
0.9), and ‘crowded’ (0.9 – 1.0). We see that the only category
that contributes less than their fair share of exposure is the
crowded category, comprising only 25% of returns while taking
up 32% of the portfolio. On the right hand side of Figure 20,
we looked at returns based on HF exposure to the crowded
stocks. We found that higher exposure to crowded positions
seems to lead to lower returns, particularly for HFs that have
50%+ exposure to crowded positions. Most of the crowded
names over this period were in consumer discretionary, health

FIGURE 20: Crowded Positions

Crowdedness Exposure vs. Contribution (2013 – 2017) Returns by % of Portfolio in ‘Crowded’ Positions (2013 – 2017)

Crowdedness
Category Range1 Difference 16% 17%
15%
‘Niche’ <0.6 29% 35% 6% 12%

‘Vanilla’ 0.6 – 0.9 39%

40% 1%

‘Crowded’ 0.9 – 1 32% (7%)

25%
<10% 10% – 25% 25% – 50% 50%+
Portfolio Return % of
28% 23% 25% 24%
Breakdown Breakdown Sample
Source: Strategic Consulting Analysis based on Novus Data from 140 managers. Any past or simulated past performance (including back-testing) contained herein is no indication as to future performance.
For Professional and Institutional Investors only. Not for further distribution or distribution to Retail Investors
1. A score assigned by Novus based on the number of managers invested in the stock and the liquidity of the hedge funds in each security – a combination of ‘illiquid’ and ‘popular’. A higher score
denotes higher crowdedness

FIGURE 21: Largest Drawdowns

Distribution of HFs by Largest Drawdown since Inception (%) Average Largest Drawdown by Manager Type and Gross Exposure1

40%

30% (6.5%)

(12.6%)

15% 15% (15.4%)

(18.1%) (7.8%)

(23.2%)
Exposure

Market Neutral Traditional HF

Average

up to (5%) (5%) – (10%) (10%) – (20%) (20%)+ Gross 139% 308% 111% 185%
Net 12% 7% 38% 37%

Gross Exposure Low High

Source: All figures refer to Strategic Consulting survey results only. Survey / interviews were conducted in Q2 2018. The results presented are from a relatively small number of respondents and therefore are
indicative only and not meant to reflect conclusive industry trends. Data and other information presented are derived directly from respondents and we cannot confirm the accuracy of such information.
Any past or simulated past performance (including back-testing) contained herein is no indication as to future performance. For Professional and Institutional Investors only. Not for further distribution
or distribution to Retail Investors
1. HFs in each category were split evenly between ‘high’ and ‘low’ gross exposure, based on the median gross exposure – Long Biased: 160%, Traditional L / S: 125%, and Market Neutral: 200%

14 | For institutional and professional investors only. For information purposes only. Not for further distribution or distribution to retail investors.
care, and information technology sectors – interestingly, most
FAANG2 stocks are in the vanilla category due to having such
high liquidity. While crowded positions can be additive, it
seems that being overexposed to them has detrimental effects
to overall returns.
Largest drawdowns
We now look at dynamics around drawdowns. The left hand
side of Figure 21 shows the distribution of drawdowns since
the inception of the HF respondents, which shows a wide
distribution. Most of the largest drawdowns were within the
(5%) to (20%) range, while only 15% of the managers indicated
their largest drawdown was more severe, losing more than
20%. It is important to note that the largest drawdowns
experienced at lower net strategies (i.e., market neutral versus
traditional HFs), were lower than those at higher net strategies,
as seen on the right hand side of Figure 21. Furthermore,
HFs with lower gross exposure also suffered less dramatic
drawdowns. The HFs in our sample most often indicated
their largest drawdowns were due to broad market factors,
as opposed to security specific issues.
Risk management
Finally, we examine the mechanisms HFs use to manage risk
and minimise drawdowns, shown in Figure 22. The three
most popular mechanisms used were research process (89%),
reducing leverage / gross (79%), and diversification (75%).
Surprisingly, reducing leverage / gross, despite its popularity,
resulted in the largest average drawdown (1.5% worse than
the next largest drawdown) and the lowest average returns
(~1% lower than the next largest average return). Another
interesting result is that stop losses and tail protection were
the least utilised, which suggests that most HFs don’t want
to inorganically adjust their portfolio just for downside
protection, though tail protection did have the lowest
average largest drawdown.
2. Facebook, Amazon, Apple, Netflix, and Google
FIGURE 22: Risk Management
Distribution of Risk Management Methods (%)
Research process
(margin of safety)
Reducing leverage / gross
Diversification
Market neutrality 39%
Strict stop losses 29%
Buying tail protection 21%
Risk mitigation / monitoring mechanisms
Source: All figures refer to Strategic Consulting survey results only. Survey / interviews were conducted in Q2 2018. The results presented are from a relatively small number of respondents and therefore are
indicative only and not meant to reflect conclusive industry trends. Data and other information presented are derived directly from respondents and we cannot confirm the accuracy of such information.
Any past or simulated past performance (including back-testing) contained herein is no indication as to future performance. For Professional and Institutional Investors only. Not for further distribution
or distribution to Retail Investors
VI. Final considerations
In conclusion, upon reflecting on the evolution of Equity HFs
over the past years, we identified three key takeaways regarding
the Equity HF industry.
First, Equity HFs have lost considerable market share of
the overall HF industry AUM. This was primarily due to
performance up until 2007 and more recently due to negative
net flows compared to the balance of HF strategies. The
overall HF industry outflows post the 2015 / 2016 drawdown
can be explained almost entirely by Equity HF outflows, which
was driven by outflows from Generalist Long / Short and
Special Sits / Activist strategies in particular. Despite these
trends, Equity HFs still retain the largest portion of industry
AUM (as a strategy), though it is likely they will continue to
lose AUM share.
Second, despite the challenges to generating alpha in the
2015 – 2016 time frame, Equity HFs have seen a resurgence
of alpha since Q1 2016. This has been aided by a confluence
of the three key market factors: low intra-stock correlation,
upward market movement, and higher dispersion. Despite the
positive market environment, manager selection continues to
be paramount – although the gap in alpha generation between
top and bottom quartile managers has narrowed recently, it
remains significant. Additionally, there seems to be performance
persistence among HFs in alpha generation, which may aid
investors in making the right decisions over time.
Third, of the many portfolio choices that Equity HFs can make,
perhaps the overarching theme is to strive to be a ‘master of
one’, rather than trying to be a ‘jack of all trades’. Whether it is
concentrating their portfolio or focusing on a particular market
cap, HFs that focus on a specific niche seem to outperform
relative to their peers.
Average Returns / Largest Drawdown (%)
Avg. Largest Avg. Returns
Drawdown (2013 – 2017)
89% (11.0%) 8.2%
79% (13.5%) 6.8%
75% (12.0%) 7.7%
(8.8%) 8.6%
(11.0%) 8.9%
(8.5%) 8.2%
General portfolio construction principles
Capital Solutions – Hedge Fund Pulse, September 2018 | 15
VII. Capital Solutions
The Capital Solutions team within Prime Services offers a Capital Introductions
unique blend of industry insights and tailored client solutions • Maintenance of ongoing investor dialogue to provide
for a broad range of issues. valuable feedback to HF managers.

Strategic Consulting • Introducing HF managers to a select number of interested

investors. Hosting events that provide a forum for knowledge
• Development of industry-leading content, driven by
transfer and discussion / debate on industry issues that helps
primary analysis, on the HF industry and its participants
educate and inform both clients and investors.
(e.g., HF and FoHF managers, institutional investors,
investment consultants). Talent3
• Provision of management consulting services to HFs, asset • Helping HF managers identify and source high quality talent
managers, institutional investors and internal management to fill openings across their organisations.
on a wide array of business topics such as the launch of a
new strategy, marketing effectiveness, product development
and organisational efficiency.
• Acting as an HF competence center internally for Barclays.

3. The Capital Solutions team does not conduct due diligence on candidates nor make any representations about the candidate to the prospective employer, or any
representations about the potential employer to the candidate

16 | For institutional and professional investors only. For information purposes only. Not for further distribution or distribution to retail investors.
This page has been intentionally left blank.
Contacts
Louis Molinari – Managing Director Ermanno Dal Pont – Managing Director
Global Head of Capital Solutions Head of Capital Solutions EMEA
Mr. Molinari is a Managing Director Mr. Dal Pont is responsible for the Barclays
and Head of the Capital Solutions group Capital Solutions team in Europe and the
at Barclays. Strategic Consulting team globally.

Based in New York, Mr. Molinari is
responsible for managing the Capital
Introductions and Strategic Consulting
+1 212 526 0742
teams within Prime Services Distribution and
louis.molinari@
barclays.com is a member of the Global Prime Leadership
Forum. Currently, he serves on the Board
of Directors for the Managed Funds
Association (MFA).
Mr. Molinari joined Barclays in September
2008 from Lehman Brothers, where he
was a Managing Director and US Head
of the Capital Introductions Investor
Coverage group. Prior to joining Lehman
Brothers, he was a founding partner and
President of Metropolitan West Securities
LLC, a US Investment Advisor and Broker
Dealer firm. Mr. Molinari began his career
at Merrill Lynch, working in various roles
throughout the firm and ultimately serving
as Managing Director of their Institutional
Asset Management businesses.
Mr. Dal Pont joined Barclays in July 2010
from Prudential PLC, where he was Head
of Strategic Projects. Prior to Prudential,
+44 (0) 20 3134 8649
he was at Lehman Brothers, first in the
ermanno.dalpont@
barclays.com Strategy and Corporate Development
Group, and then in the Principal Investing
division. Mr. Dal Pont spent the first six
years of his career as a consultant for
McKinsey & Company, advising Asset
Managers and other financial institutions.
Mr. Dal Pont holds an MBA from Columbia
Business School and an undergraduate
degree in Economics from Bocconi
University, Italy.

Mr. Molinari holds a JD from Fordham

University Law School and a BS in Business
Administration from Fordham University.

Roark Stahler – Director

Mr. Stahler is a Director on the Barclays
Capital Solutions Strategic Consulting team
in New York.

Mr. Stahler joined Barclays in June 2008 as

a member of the Strategy team working
on various projects across the Investment
Bank. Prior to joining Barclays, he worked
+1 212 526 9065 as a consultant for McKinsey & Company,
roark.stahler@
advising Asset Managers and other
barclays.com
financial institutions as well as several
other client types.

Mr. Stahler holds an MBA as well as a

BA from the Stern School of Business at
New York University.

18 | For institutional and professional investors only. For information purposes only. Not for further distribution or distribution to retail investors.
 Koshin Kunieda – Assistant Vice
President
Mr. Kunieda is an Assistant Vice President
on the Barclays Capital Solutions Strategic
Consulting team. Prior to joining Barclays
in 2017, he was a Team Leader for Third
Bridge, providing primary research to
hedge funds.
+1 212 526 0009
Mr. Kunieda holds a BA in Economics from
koshin.kunieda@
barclays.com Columbia University.
Angela Shen – Assistant Vice President
Ms. Shen is an Assistant Vice President on
the Barclays Capital Solutions Strategic
Consulting team. Prior to joining Barclays in
2017, she was a consultant for BlackRock’s
Financial Markets Advisory team, advising
central banks and financial institutions.
Ms. Shen holds a BA in Economics from
+1 212 526 2810
Princeton University.
angela.shen@
barclays.com

Angus Stewart – Analyst

Mr. Stewart is an Analyst on the Barclays
Capital Solutions Strategic Consulting
team, which he joined in 2016.

Mr. Stewart holds a degree in Classics from

Durham University.

+44 (0) 20 3555 2172

angus.stewart@
barclays.com

Capital Solutions – Hedge Fund Pulse, September 2018 | 19

Notes

20 | For institutional and professional investors only. For information purposes only. Not for further distribution or distribution to retail investors.
Contacts
Louis Molinari Ermanno Dal Pont
Managing Director, Global Head of Capital Solutions Managing Director, Head of Capital Solutions EMEA
louis.molinari@barclays.com | +1 212 526 0742 ermanno.dalpont@barclays.com | +44 20 3134 8649

Roark Stahler Koshin Kunieda

Director Assistant Vice President
roark.stahler@barclays.com | +1 212 526 9065 koshin.kunieda@barclays.com | +1 212 526 0009

Angela Shen Angus Stewart

Assistant Vice President Analyst
angela.shen@barclays.com | +1 212 526 2810 angus.stewart@barclays.com | + 44 20 3555 2172

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CSNY634764 A4 v11 | September 2018