Hedge fund managers are increasingly diversifying their product lines and seeking to provide differentiated solutions to investors.
According to a recent survey by Deutsche Bank, large hedge funds managers continue to capitalize on emerging business opportunities outside their core hedge fund offering.
Products outside traditional offering
According to the survey, the number of hedge fund managers currently running non-traditional hedge fund products is substantial, with half of the respondents currently offering at least one product outside their traditional hedge fund offering, and another 20% would consider it. This is revealed in the following graph:
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Interestingly, the above trend has been most pronounced among large, well-established firms who have significant AUM and a successful hedge fund business. As can be gauged from the above graph, 81% of $5 billion plus managers have a product suite whose range extends beyond traditional hedge funds.
The survey further highlights those managers who have embraced non-traditional hedge funds as a way to grow and expand their businesses have been rewarded with new asset flows. For 48% of mangers running an extended suite of products, almost half of new business since 2008 has been for non-traditional hedge fund products.
Hedge funds gearing as solution providers
The Deutsche Bank survey highlights that since 2008, hedge fund managers have dedicated a significant amount of time and resource to developing their marketing and investor relations efforts, with a view to understanding better the diverse needs and objectives of their existing clients and prospective investors.
With a greater appreciation of the key drivers of investors’ asset allocation plans, hedge fund managers have been increasingly focused on offering clients a broader and more diversified suite of investment products.
The survey thus emphasizes that hedge fund marketing has been increasingly geared towards providing solutions as opposed to selling products.
As revealed in the following graph, hedge fund managers are crossing over into non-traditional products because clients are asking them to, with 67% of responding managers indicating that demand from existing clients is one of the top 3 reasons for diversifying the product line.
Growth of liquid alternatives
The Deutsche Bank survey points out that the financial crisis, coupled with ongoing regulatory change, has reinvigorated the market for liquid alternatives, which largely consists of alternative ’40 Act mutual funds and alternative UCITS vehicles.
The survey highlights the fact that while assets residing in liquid alternatives and hedge fund-run long only products currently represent a small portion of these markets, recent growth rates in each of these arenas suggest that the gap will narrow in the coming years, and that it will be driven by hedge fund managers.
As the following graph highlights, the single most attractive benefits of investing in alternative UCITS or alternative ’40 Act mutual funds as reported by the survey’s investor respondents is increased liquidity, improved transparency, lower fees and regulatory oversight.
The survey notes that with a wide variety of new growth channels, one can expect hedge funds to become an even more formidable part of the wider asset management industry in the years to come.