ICBI Research: Managers must see the world through investors’ eyes

A new research paper from the investment funds conference producer ICBI answers key questions and sets out a number of action points for alternative investment managers as they move from the ‘noughties’ into the ‘teens’. 

This paper, based on detailed research with over 40 key members of the investment community, offers insight into investor expectations moving forward, and includes the following five questions:

 

 

It is undeniable; the reputation of the alternatives industry has been rocked by high profile cases of fraud, pyramid schemes and insider trading, and, as a result, investors are wary and far more cautious than ever before.

 

However, they remain positive about the benefits of investing in hedge funds and most are not planning to walk away. Instead they have had to revolutionise their decision making process greatly and there is a now lot more to consider when making an investment. 

 

There is also an understandable need to know that money can be accessed easily and frequently if need be. Liquidity is what most investors require. This, in part, is a response to the gating of funds last year. Many investors were against gating entirely and those that understood that gating was necessary to protect the fund felt that they could have been treated with greater respect and been consulted more in the process.

 

This is a call to create more of a partnership between investor and fund manager and a real investor need to feel consulted and part of the decision making process.

 

 

Liquidity is king! Now more than ever, liquidity is an important consideration when investing. Generally, for non-private equity structures, monthly liquidity is expected and weekly liquidity is held in high regard. New products that offer this such as UCITs 3 and platforms that achieve this such as managed account platforms are gaining popularity. In particular, if an investor wants to invest in a certain fund, it is becoming common for the investor to ask that fund to join a managed account platform so that they can access the fund in this way. This builds in an extra layer of liquidity and, perhaps more importantly, transparency.

 

Furthermore, there is an increasing call for more tailored and customised solutions. Investors are expecting hedge funds to rise to the occasion and offer products tailored to their specific needs. A broader range of capabilities is now expected.

 

 

Understandably, favoured hedge fund strategies vary between investors although Global Macro is proving to be a very popular strategy currently. 

 

The days of chasing performance over and above all else are over. Investors are now more focused on diversifying their strategy and avoiding over-reliance on any one strategy. The sophisticated investor is aiming to capture the opportunities that have come about as a result of the crisis.

 

One thing that remains clear is that investors are still listening and still keen to hear about the performance of different strategies before making investment decisions.

 

 

In a world where trust has been knocked, of course brand matters. However, investors are aware of the need to diversify and to access smaller funds with more niche strategies instead of just favouring the big players. The investor is however, generally more cautious when investing in smaller, less known funds. As a result investment consultants are recruited, due diligence is very thorough and platforms (fund of hedge funds and managed account platforms) are used when possible to provide access to the smaller funds with the greatest safety,

 

 

The selection process has changed. A lot more is considered now. Performance is still an important factor but assessing a fund’s due diligence and risk management frameworks are now top of the list. Transparency is also now the key consideration. There is now zero tolerance for not having 3^rd party administrators and visits to the fund to personally check due diligence processes are becoming much more commonplace. In addition, another element now considered more thoroughly whilst making an investment decision is the fee structure. The shake up is being seen as a catalyst for change in all aspects of the investor/ hedge fund relationship. It presents the opportunity the redraw the lines and shift the balance between investor and fund manager power. Be prepared for more frank conversations in the future!

 

As a result of this research conducted with investors, ICBI has highlighted the following four key action points to help alternative managers strengthen the trust of the traditional investors and gear their funds to attract the attention of retail and institutional investors:

 

Gone are the days when flying below the radar and being ‘ungoogleable’ served as an indication of your expertise and standing. Now secrecy evokes fear in the hearts of the investors. The industry needs to be more forthcoming to calm worries of pyramid schemes and fraud. How can you reinvent your firm’s profile? How can you build a presence in the industry that appeals to new investors? In addition, in an era when investors require the warm fuzzy feeling of face-to-face contact, how can you build this into your marketing strategy? 

 

“What shape is your risk management & due diligence in?” This is the first question on the mind of every investor. Can you answer this comfortably? How effective have you been at embedding risk into the decision making framework, achieving accurate valuations and disclosure? How much further should the hedge fund industry look towards the long only world with regard to corporate governance, granularity and transparency? 

 

Liquidity is king! For many strategies monthly liquidity has become a must and weekly liquidity is fast becoming the thing to aim for. In addition, wrapping your fund in a UCITS 3 structure or joining a managed account platform both represent credible options to offer the investor greater liquidity and transparency. UCITs Vs Managed Accounts: what is the best option for you? Is your strategy suited to offering increased liquidity? If not what should you do to keep up with investor preference? 

 

With a new generation of liquid and transparent products on the hedge fund manager’s shelf it is only a matter of time before the merging of the long only and the alternatives world takes place. Hedge funds are entering the mainstream and as a result are appealing to the institutional and perhaps even the retail investor. How can you capitalise on this? How can you successfully expand your distribution channels into these more non-traditional areas? 

 

The hedge funds industry not only fared much better during the crisis than the long only world, it has also been much quicker to spring back into action. As an innovative, resourceful and fast paced industry populated by creative and cutting edge thinkers, hedge funds are uniquely positioned to become a key component of the mainstream investment universe moving forward.