Enhanced transparency around performance and regulatory scrutiny top fund managers’ challenges in alternative funds, according to a recent survey conducted by State Street.

According to the survey, with $5.5 trillion held across hedge funds, private equity and real estate funds, the alternative fund industry has grown considerably since the turn of the 21st century.

The following provides a birds-eye-view of the survey results:

Alternative Fund Industry Survey

Performance Is Paramount

The survey conducted by State Street, in collaboration with Preqin, throws light on the key areas where leading managers would focus to achieve profitable growth.

Generating performance tops the list of challenges faced by the alternative fund managers, with over 54 percent feeling that this would be the key focus area over the next five years. They aim to achieve this by adding new investment strategies through in-house resources over the next five years.

The report emphasizes the ability of alternative assets to outperform equity and bond indices over the longer term as key attraction for many investors.

Enhanced Regulatory Scrutiny

Over 41 percent of hedge fund managers and 40 percent of real estate managers attribute regulation as the next top challenge over the next five years. Interestingly, only 27 percent of private equity managers are concerned about regulation.

The report highlights about 60 regulatory initiatives in the European Union that have either direct or indirect impact on the fund managers. The report notes the fund managers are particularly concerned about the challenges posed by host of provisions germinating from Dodd-Frank, AIFMD and FACTA.

The survey report particularly highlights the following three areas as key priorities for fund managers.  The fund managers need to address regulatory requirements efficiently, by avoiding distraction to professional staff from areas where they add value. Further, the fund managers should also raise the bar on performance and risk besides having advanced operational systems and processes in place.

Operational Excellence

The State Street survey highlights the institutional investors have increasingly backed alternative fund managers, making them part of a multi-trillion dollar industry. However, the report cautions this ‘institutionalization’ enforces an evolution in the industry’s operating models. With institutional investors raising the bar of expectations on the alternative fund managers, the latter should have strong operational and investment infrastructure in place to manage the money invested in their funds. For instance, the report notes there is greater need to have better data and analytics in place.

The report concludes that the next five years would be as dynamic as the past ten years. The report notes enhanced transparency and better operational infrastructure would offer benefits to both managers and investors.