Hedge funds look for growth while investors look for quality
Hedge fund managers are looking to expand their current business models via new products and distribution channels but are finding that investors are reluctant to lift their allocations or purchase multiple products from one manager.
According to recent survey data released by EY (formerly Ernst and Young), two thirds of hedge fund managers globally are looking to grow their operations in 2014. However this growth may be hampered by institutional investors, with nearly three quarters stating they would maintain current levels of allocation to hedge funds.
The survey, the seventh of its type conducted for EY, compares the opinions of 100 hedge fund managers collectively managing nearly US$850 billion and 65 institutional investors with over US$190 billion allocated to hedge funds.
EY found that areas of growth targeted by hedge funds include new strategies and products as well as distribution networks and channels where they have not previously been engaged.
EY Oceania Asset Management leader Antoinette Elias said growth was the top strategic priority of hedge fund managers, including those operating within Australia.
"Australian fund managers also have growth at the top of their agenda, with many of the larger players diversifying their strategies and product offerings."
Elias said that despite this push investors are becoming more selective and are less interested in using one manager for multiple investment strategies and are looking for the best of breed for particular strategies.
Yet this does not mean that Australian hedge funds can expect significant increases in 2014, with EY Oceania Hedge Fund leader Jon Pye stating that structural conditions in the local market will still have a strong influence.
"Unlike their Asian counterparts, Australian managers have generally not seen the same growth in flows, and for many conditions remain tough. While foreign capital remains an untapped source for many local fund managers, until the Investment Management Regime is finalised, tapping that market remains a challenge."
Pye said local institutional investors, particularly large superannuation funds, remain highly fee sensitive — which could limit a source of direct funds for many hedge fund managers.
"With the introduction of My Super, many would not even consider investment into a hedge fund with a traditional ‘2 and 20 structure', regardless of the net return. This approach may be short-sighted though, as many of the best hedge fund managers outperform traditional managers on a net basis."
Managers operating complex funds in the retail space will also need to comply with increasing disclosure requirement, according to Pye, despite the hedge fund sector seen as not posing a systemic risk to the Australian financial system.
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