Hedge fund managers are feeling the pressure of changing investor demands, and the managers that adapt to these changes will be the most successful in achieving growth, according to the EY 2016 Global Hedge Fund and Investor Survey: Will adapting to today’s evolving demands help you stand out tomorrow?
The 10th annual survey found that hedge fund growth has slowed for a variety of reasons including the abundance of low fee passive investment options, lackluster hedge fund performance and cost concerns.
EY Oceania Wealth and Asset Management Leader, Antoinette Elias says growth is now the key focus area for the industry, with more than half (56%) of hedge fund managers surveyed listing asset growth as their top priority. But, in a year that ushered in unprecedented change in the appetite of investors, managers are having to change the strategies employed to achieve it.
“Investors have more options than ever within the alternatives marketplace and are allocating funds to those managers that have a unique offering that is satisfying a specific need. So, it is imperative for hedge fund managers to identify the needs of their clients and align product offerings to their demands,” Elias says.
“While the largest managers are pursuing several growth strategies, we are beginning to see smaller managers adopt a narrower focus as they seek to expand investor bases within their home markets. Whichever approach they are taking, hedge fund managers of all sizes must make sure they are listening to their investors to keep pace with their changing needs, or risk being left behind.”
Hedge fund managers focus on asset growth to counter reduced inflows
Almost half (48%) of investors surveyed expect their hedge fund investments to shift, from traditional hedge funds to other alternatives, over the next three to five years. And 42% expect to shift from co-mingled hedge funds to customised vehicles and segregated accounts.
EY Oceania Hedge Fund leader, Jon Pye says: “At a global level, we are seeing assets flowing to the managers that offer a wide array of non-traditional hedge fund products. But, although investors have a broad appetite for real assets (63% invested), private equity (59% invested), long only funds (56% invested) and best ideas funds (51% invested), only a small percentage of hedge funds currently offer these products. In Australia we are seeing this trend at the portfolio level, particularly with PE-like assets, rather than additional funds.”
The report also found managers of all sizes view next generational data and technology as a means to enhance their investment program and attract investors. More than half (52%) of managers use non- traditional or next-generation data and big data analytics to support their investment process. However it’s the smallest managers who are most active in this space, with 59% indicating that they use this technology.
As fee pressures increase, managers need to innovate and optimise processes to cut costs
Hedge fund managers’ average operating expense ratio is down from last year – from 1.95% in 2015 to 1.84% in 2016 (including management fee) – but investors feel there is still room for improvement.
“Despite the downward trend, only 1 in 5 investors are currently satisfied with the expense ratios of their funds. A lack of performance, the range of lower cost alternatives and investors’ increased comfort in trading on their own behalf is causing them to challenge fee terms with their managers,” Pye says.
“Managers have already achieved significant operational cost reductions. In fact, nearly half of all managers surveyed (44%) reported actual or expected cost reductions in the middle and back office. However, they agree there are still opportunities for further efficiencies.”
Almost 80% of investors approve of outsourcing middle office functions to further reduce costs, but only 18% of managers currently outsource this area or plan to do so. In the back and middle office though, robotics and automation are helping create efficiencies and drive the savings necessary to counteract margin compression.
Increasing focus on developing talent management programs
Investors are increasingly requesting details on hedge funds’ talent management programs – with 75% of investors surveyed indicating they use this information as a key consideration in their due diligence.
Although 52% of managers are confident that client loyalty is rooted in strong relationships between the firm’s founding principals, 55% of investors state their primary allegiance is to their portfolio manager.
“Investors need be confident in the institution’s ability to generate returns if a ‘star’ leaves,” Elias says.
“To bridge the existing gap in perceptions, managers must focus on evolving their talent management strategies and creating succession plans for their portfolio managers. Having the right programs in place to help them secure, grow and retain talented investment professionals, will help drive the business forward and achieve maximum growth.”
