Hedge fund managers are feeling the pressure from changing investor demands, with 48 per cent of investors globally expecting to shift their investments from traditional hedge funds to other alternative products over the next three to five years, according to an EY survey.
"Hedge funds are experiencing slow growth globally," says Fraser Whale, EY's Canadian alternative funds leader. "With an abundance of low-fee investment options and savvy investors pushing for fee transparency, we're seeing a bit of a fight for growth, in Canada, too. Investors have more options than ever in the alternatives marketplace, and fund managers really need to deliver on their investors' concerns to stay competitive."
According to the EY 2016 Global Hedge Fund and Investor Survey: Will adapting to today's evolving demands help you stand out tomorrow?, in a tough global economy, alternative products go outside the standard hedge fund offerings to provide more yield and diversity to investors.
Managers of all sizes are turning to advanced technology to improve their offerings. According to EY's report, more than half (52 per cent) of managers globally use non-traditional or next-generation data and big data analytics to support their investment process, or plan to do so in the next two to three years. The smallest managers are the most active, with 59 per cent indicating that they use this technology.
"In Canada, we don't see fund managers using data analytics to the same extent, but it is definitely becoming a growing area of focus for them," says Whale.
Including management fees, the expense ratio is down from 1.95 per cent in 2015 to 1.84 per cent in 2016, but investors feel there is still room for improvement. This is forcing managers to innovate and optimise processes to cut costs – everything from making reductions in the middle or back office, to outsourcing, to using robotics and automation.
"In Canada, CRM2 regulations are bringing the importance of transparency and management costs to the forefront," adds Whale. "It's an opportunity for Canadian fund managers and investors to re-evaluate their value proposition in this new environment and look for opportunities to differentiate how these funds can contribute to overall wealth goals."
Developing talent is becoming a competitive edge for hedge funds. According to EY's survey, investors ask for details on hedge funds' talent management programs. In fact, 75 per cent of them use this information as a key consideration in their due diligence.
The survey also found that 55 per cent of investors state their primary allegiance is to their portfolio managers, as opposed to firms' founding partners. Therefore, attracting and retaining top talent is key to retaining clients.
"There's no doubt investors look for talented fund managers," says Whale. "But they also want to make sure their investments are taken care of if their portfolio manager leaves the firm. Hedge funds' talent programmes need to be robust to remain competitive."