As asset growth in traditional hedge funds from institutional investors continues to slow, hedge fund managers are pinning their hopes on the power of new products to attract investor assets and drive growth.
However, many are underestimating the costs involved and the effect on margins, according to EY’s 2014 global hedge fund and investor survey, Shifting strategies: Winning investor assets in a competitive landscape.
The trend of a gradual slowing of allocations to traditional hedge funds continues.
In 2012, 20% of institutional investors expected an increase in their allocation, while in 2013 that declined to 17%.
In the 2014 survey, 13% say they plan to increase their allocation to traditional hedge funds in the next three years, while 13% expect to decrease their allocation and 74% expect it to remain the same.
In North America and Europe, those investors decreasing allocations outweighed those increasing by approximately 25%. Among those investors who would like to increase or maintain allocations, 40% say they face obstacles such as allocating too much to a single asset class.
“Given this backdrop, managers are trying to offer investors more flexibility on fees and tailored offerings via separately managed accounts and long-only funds,” says Michael Serota, co-leader, global hedge fund services, at EY. “They are hoping to attract a new class of investor—private wealth platforms—as well as developing registered liquid alternatives products to try to attract new investors. The largest managers are even developing sub-advisory capabilities and insurance-related products.”
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