Investors shifting strategies driving hedge funds towards new products

Date: Thursday, December 4, 2014
Author: Investment Executive

New products offer potential for growth, but challenges persist

As asset growth in traditional hedge funds from institutional investors continues to slow, hedge fund managers are considering new products to attract investor assets and drive growth, according to EY's 2014 global hedge fund and investor survey.

After five years of focusing on transparency, cost containment, restructuring operating models and adapting to heavy regulatory burden, hedge fund managers are shifting their focus back to growth.

"Increased competition for assets means managers are considering a wide range of paths to achieve growth," says Joseph Micallef, financial services partner and Canadian wealth and asset management industry tax leader at EY. "One way we're seeing them meet these growth challenges is through seeking new capital-allocation channels. They're also evolving to meet stakeholder needs by offering new products in areas such as real estate, commodities, hedge funds, private equity and infrastructure."

"New products, as well as investing in the business, will allow managers to attract more assetf from new and existing investors," says Gary Chin, financial services partner and Canadian wealth and asset management industry leader at EY. "Managers who focus on reducing business-risk concerns and customizing products which produce alpha for their investors will open up new types of investor bases that may not have historically invested in hedge funds." This is easier said than done, and not without its challenges, however.

"Many underestimate the costs involved with new products and effect these offerings can have on margins," says Micallef. "Nearly one in four managers who have launched a product in the past three years witnessed a negative impact on margins."

Launching a new product requires significant investment in infrastructure, particularly technology. Managers can often leverage personnel across different product types but must invest in new risk systems and other middle-office and back-office infrastructure, particularly for regulated products.

"Creating new products is one way hedge fund managers are customizing solutions for evolving investor needs," says Micallef. "To win assets — in the absence of an established track record — managers must be able to articulate their value proposition and investment philosophy. That's how they'll set themselves apart from the competition — and grow — going forward."