During the Great Recession, hedge fund managers dealt with difficult economic conditions. In an improved economic climate, lack of performance and higher expectations of investors mean hedge fund managers should make some salient changes for their long-term success.
“With an increasingly crowded field of competitors, rising institutional demands, and a decade of disappointing overall returns, hedge funds are at a critical juncture,” said SEI Vice President Ross Ellis in a 2013 study.
“Based on what we heard from institutional investors and fund managers, it’s time for the industry to make an evolutionary leap in proving its worth to a hungry yet hesitant investor base,” added Mr. Ellis.
In essence, the study concludes hedge fund managers must “rethink their business models, provide tailored solutions, and offer multi-faceted client communications.”
Individual and institutional investors, 50 hedge fund managers, and consultants took part in roundtable discussions in London and New York, which were moderated by Minard Capital.
SEI’s insights resulted from its sixth annual global survey of roundtable participants.
“Success in identifying, securing, and retaining institutional and private client assets today requires new tactics. These include a defensibly true and transparent investment process and a competitive edge that is verifiable internally and corroborated by the investor,” said Rachel S.L. Minard, founder and CEO of Minard Capital.
“Managers must know how to defend their edge against competitors, investment instruments, and vehicles investors now have at their disposal to meet their risk/return targets,” she added.
The 48-page study, “6 Ways Hedge Funds Need to Adapt Now,” identifies key challenges hedge fund firms must meet for long-term success:
1. Sustainable edge.
With seven in 10 survey respondents asserting that “there are too many look-alike strategies in the industry,” institutional investors are raising the bar for manager selection.
To be competitive, hedge fund firms should focus on articulating a differentiated investment approach, a clear process, and proof that their edge can be sustainable.
Roundtable participants noted that the combination of converging investment structures, shifting investor demands, and challenging market conditions are causing hedge fund managers to rethink their business models and develop multi-faceted solutions that package their capabilities most effectively.
3. Clear value added.
Investors are increasingly concerned with how much “true alpha” they are getting for the hedge fund fees they pay.
While most of the institutions surveyed are still planning to maintain or modestly increase hedge fund allocations, only 38 percent reported being satisfied with risk-adjusted hedge fund returns, down from 62 percent a year ago.
Moreover, 6 in 10 of the institutions surveyed believe it is possible to meet investment objectives without allocating to hedge funds.
4. The right fit.
Today’s investors have complex needs and want hedge funds to serve multiple objectives within an overall portfolio mix. Poll results suggest that rather than “pitching products,” fund managers should use an interactive, problem-solving approach to match their capabilities to investors’ specific objectives.
It also calls on institutional investors and consultants to develop clear, focused mandates based on realistic expectations.
5. Scale or sizzle.
Size presents challenges and opportunities at either end of the hedge fund scale. While large funds still attract the majority of institutional assets, and have advantages in building institutional-quality processes, their performance has collectively lagged that of smaller funds.
Meanwhile, while small funds may be better equipped to offer competitive returns, emerging strategies, and undiscovered investment talent, they often fail to pass the screens consultants frequently employ when selecting managers.
6. Business and marketing acumen.
SEI’s roundtable participants resoundingly agreed that running a sustainable hedge fund business is as difficult as achieving strong investment performance.
Notably, participants also felt that asset growth often depends less on investment performance than on effective marketing and sound business management.
Managers need to make strategic use of outsourcing, adopt marketing best practices, and invest more on compelling client communication in order grow their businesses.
SEI, www.seic.com,is a leading global provider of investment processing, fund processing, and investment management business outsourcing solutions that help corporations, financial institutions, financial advisors, and ultra-high-net-worth families create and manage wealth.
Minard Capital LLC, www.minardcapital.com, is an independent, global marketing strategy firm headquartered in San Francisco.
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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.