Investors are leading the way in shaping the future of the alternative investment industry, according to a soon to be published global survey by State Street.
The survey canvassed the opinions of 400 alternative fund managers from hedge funds, private equity firms and real estate funds.
“The Next Alternative: Thriving in a New Fund Environment” finds that fund managers see investor demands for greater transparency, more favourable fees and greater liquidity at the fund level as three of the top five drivers of change over the next five years.
“Alternative asset managers that want to create a competitive edge need to balance meeting new requirements from investors and regulators while ensuring operational and performance excellence,” says George Sullivan, executive vice president and global head of State Street’s alternative investment solutions. “The mainstreaming of this asset class debunks common misconceptions that have hindered opportunities for investors and fund managers alike.”
Some of those common misconceptions about the alternative fund industry are:
Misconception: Alternative fund managers have been reluctant to offer greater transparency into fund performance and risk
Reality: Managers are reporting more information to investors, more frequently. Forty-four per cent of fund managers have increased the amount of information they report on their holdings, risk and performance since 2008 and an additional 16 per cent plan to do so over the next five years. Almost one third (32 per cent) have increased their reporting frequency since the financial crisis. Capturing, structuring and reporting data “on demand” for stakeholders will give managers a clear advantage as investor demand for greater transparency in risk and performance was the most cited driver of change in the alternative fund industry today.
Misconception: The era of major change in the alternative sector is largely finished
Reality: Growing competition means that alternative fund managers are reassessing their fee structures and seeking ways to differentiate their offerings with new product and investment strategies. Twenty-nine per cent of alternative fund managers surveyed indicated they planned to add new investment strategies with in-house resources over the next five years, while 25 per cent said they have done this since 2008.
Misconception: Alternative industry regulation is stifling growth and innovation
Reality: Although burdensome for many, the new era of heightened regulation is also creating opportunities for managers to distinguish themselves from peers and tap into investor appetite for increased transparency and oversight. Of the 86 per cent of alternative fund managers who expect their costs to increase over the next five years, largely driven by regulation, 75 per cent are optimistic that this will not constrain their growth potential.
“This survey highlights key changes that are coinciding with the growth and maturation of alternatives as an asset class and offers a glimpse into what the next five years will look like for the industry,” says Sullivan. “Managers who remain innovative as they respond to demands from investors will be positioned for success in this new era where investors will look to employ alternatives more commonly than ever before.”
Important trends and possible shifts in the industry over the next five years include:
Regional expansion: Nearly one in five fund managers (18 per cent) surveyed plan to expand into new regions by 2018.
More managed accounts: More than one in four (26 per cent) have introduced managed accounts in the past five years, and another 18 per cent plan to do so by 2018.
More hybrid funds: A majority of respondents (58 per cent) say that hybrid alternative fund structures, which blend features of traditional hedge fund and private equity vehicles, will increase over the next five years.
M&A activity is set to increase: 10 per cent of fund managers plan to acquire another business in the next five years; this compares to seven per cent who have already done so in the past five years.