As the hedge fund industry matures, most managers are increasingly focused on growth, according an EY (formerly Ernst & Young) survey.
However, the survey shows that while managers want to grow through new products and distribution channels, investors aren’t necessarily planning to increase their investments.
“Managers are bullish about their growth prospects, but investors don’t seem to share that sentiment,” says Joseph Micallef, financial services partner and Canadian asset management industry tax leader at EY.
The majority of investors (72%) expect to maintain their current allocation levels.
As investor and regulatory demands grow, managers are focusing relentlessly on operational efficiency and costs in the battle to maintain margins.
Two in three managers reported an increase in revenues over the past year, as their performance improved and assets grew. But, only half reported improvements in margins.
And one in three managers say margins declined and another 10% note that margins remained unchanged as costs increased. Meanwhile, 58% of managers in North America noted that costs have increased.
Still, while managers and investors may be at odds when it comes to growth, they agree on the growing demand for customized solutions.
“We found that nearly two-thirds of investors either already invest or would like to invest in a customized product,” says Micallef. “Managers in the U.S. are ahead of the curve when it comes to offering customized solutions, with 75% either already offering, or planning to offer, customized solutions—and we expect this solution to grow in popularity here in Canada as well.”
Customization is especially popular among funds of funds, with nearly 70% of funds of funds already investing in a customized solution and another 15% saying they would like to.
“All factors considered, the hedge fund industry is alive and well—albeit, the reasons for success vary,” says Micallef. “While the largest funds are succeeding because of their size and scale and their ability and willingness to invest in the business, the smallest funds are succeeding by virtue of their simplicity.”