Deutsche Bank has published the results of a survey which examines the expanding role of hedge funds within the wider asset management industry.
From Alternatives to Mainstream analyses how hedge funds have evolved to run non-traditional products such as long-only and liquid alternative strategies to meet new demand from institutional investors.
Institutional investors are moving away from traditional asset allocation in favour of a risk-based approach, incorporating hedge funds into their core portfolio rather than as a separate alternatives allocation. This removes constraints on allocations to alternatives, and investors are now choosing to work with trusted hedge funds on new products such as liquid alternatives and long only strategies.
Key findings of the study, which surveyed both investors and managers, include:
Over half of investor respondents allocate to non-traditional hedge fund products, including 36 per cent who invest in hedge fund-run long only, and one third investing in liquid alternatives operated by hedge fund managers. One third of all investors increased their allocations to non-traditional hedge fund products last year, and another 43 per cent on average plan to increase their allocations over the next 12 months.
Half of manager respondents now run non-traditional hedge fund products, and 48 per cent of those managers have seen more than half of new business since 2008 directed towards non-traditional hedge fund products.
The trend towards product diversification is most pronounced among the large, well-established firms: 81 per cent of managers with more than USD5bn in hedge fund assets under management (AUM) have launched at least one non-traditional hedge fund product.
One fifth of all responding managers have plans to launch at least one non-traditional hedge fund product over the next 12 months, and another 42 per cent are considering it.
Hedge fund managers are crossing over into non-traditional products because clients are asking them to – 67 per cent of responding managers say that demand from existing clients is one of the top three reasons for diversifying the product line.
Evolving investor demand continues to drive growth for liquid alternatives and long only vehicles run by hedge funds: 55 per cent of long only assets managed by hedge fund manager respondents are from institutional investors, whereas retail capital accounts for 54 per cent of assets in alternative ’40 Act mutual fund run by responding managers. Funds of funds and private wealth represent nearly 60 per cent of assets residing in alternative UCITS funds managed by respondents.
Daniel Caplan, European head of global prime finance at Deutsche Bank, says: “This study highlights the expanding relationship between institutional investors and the hedge fund managers that have built trusted partnerships and a reputation for delivering strong risk adjusted returns.”
Anita Nemes, global head of capital introduction at Deutsche Bank, says: “An ever increasing number of hedge fund managers are diversifying their product range as they seek to provide differentiated solutions to institutional investors.”
The study received responses from 200 investor entities worldwide managing more than USD625bn in hedge fund assets and 60 global hedge fund managers representing USD528bn in firm wide assets.