By Michaël Malquarti (pictured), SYZ Asset Management – Although the phenomenal growth in index management since the 1990s had already begun to shake up the fund management industry, the 2008 crisis triggered a more profound reform process. This change is particularly visible in the alternative investments arena. As well as reinforced standards governing hedge funds, the most spectacular transformation has probably been the emergence and astonishing growth of alternative UCITS in Europe.
Several factors underpin this situation. Current macro-economic uncertainty and the associated asset volatility are certainly behind stronger demand for different types of funds, generally perceived as being less risky. To a lesser extent, we can also see it as the result of a paradigm shift in portfolio construction, as investors gradually move from an allocation by asset class to an allocation by factors, combining index-based funds with a diversified pool of alphas and/or solutions designed according to a precise return profile.
Supply has adapted to meet this demand. On the one hand, hedge fund managers were ready to revise their models to satisfy demand from European investors for better regulated, more transparent, more liquid alternative vehicles. On the other hand, so-called traditional managers, partly driven by competition from index-based funds, wanted to grasp the opportunity to free themselves from certain constraints in order to offer solutions less tied to benchmark indices.
While plenty of column inches have been devoted to debating the merits of this new format, much less has been said regarding the impact which the coming together of two previously separate worlds is beginning to have on the fund management industry.
Until recently, fund management was characterised by a dichotomy between traditional funds on the one hand and hedge funds on the other. Each had its own distinct community of asset managers, salespeople and selectors each with their own specific culture. In the first place, setting aside strategy aspects, the criteria for selecting and monitoring funds were significantly different.
The most important tools for a hedge fund analyst were the use of a network to identify new candidates, the manager's reputation within the community, analysis of operational structures and regular on-site visits to identify potential risks.
For a traditional fund analyst, it was more a question of using sophisticated filters on large databases, the legal structure and regulatory aspects linked to the distribution of the fund, as well as frequent and detailed analysis of the portfolio and performance. Furthermore, while the investor's macroeconomic perspective is less important in the case of hedge funds, it plays a crucial role in the investment decisions of a traditional fund, given the strong influence of the market on returns obtained.
Finally, there are also notable differences in the size of the two worlds, the typical fees structure and the investor's average investment horizon.
Yet, as mentioned above, for several years now the two worlds have begun to overlap, meaning that managers today face very different expectations and behaviour on the part of investors. Analysts are also coming together and attempting to find a common language. It is evident that we are seeing a merging of two cultures, which will eventually lead to the formation of a continuum spanning the entire fund management industry.
This development is beneficial to the investor since it expands the range of products and increases competition between managers. In terms of research, if each pool of experience is combined, they will mutually enhance one another, strengthening selection quality as a result. At SYZ, with a single team dedicated to searching out talented asset managers, wherever they are to be found and whatever they do, that is exactly what we are striving for.
