As the hedge fund industry matures, managers that survived the financial crisis are now beginning to focus on growing beyond their original business models.
However, this optimism is not shared by investors, according to a recent EY (formerly Ernst & Young) survey.
Seventy-two percent of investors say that they expect to maintain current allocation levels, while managers, particularly smaller managers, remain bullish about both inflows and market appreciation. Managers with less than US$10 billion under management are budgeting for 15% growth in 2013.
“While managers seem determined to diversify their offerings, investors are much less interested in buying multiple products from the same manager,” says Michael Serota, EY’s global hedge fund services co-leader. “Instead, they seek the best type of manager for particular strategies. This explains why managers attract money from new clients at almost the same rate as they do from existing clients.”
There’s also been a shift to direct investment. More than 75% of hedge fund managers in Europe and North America say that direct investment has increased, and most expect this trend to continue.
“Direct investment continues to increase and is preferred by managers, with intermediation shifting away from funds of funds to investment consultants,” says Serota. “As such, some funds of funds are offering more advisory-like services in order to compete. With returns likely to remain subdued and investors finding access easier, there will remain a focus on the costs of intermediation.”
An increasing proportion of managers expect that they will work with investment consultants in the coming years, which has meaningful implications for managers’ marketing strategies and service models.
Funds of funds are responding by seeking out newer, smaller managers, seeking greater concessions from them and being able to present smaller institutional investors with a package that is still saleable.