According to a recent report from research and financial services firm KPMG International, the next couple of years are likely to be a time of continuing growth but changing demographics and business models for the global hedge fund industry. The report, titled Growing Up: A New Environment for Hedge Funds, argues that new strategies, new investors, new markets and new and more customized products and services are changing the market dynamics of the hedge fund industry.
Shift toward institutional investors
The KPMG report points out that institutional investors already represent two thirds of the total hedge fund capital, and will continue to overshadow high net worth individuals as the primary source of investment in the future. Moreover, “traditional fee arrangements will erode in the face of more customized models. And new markets will emerge both as investment destinations and as potential customers.”
By the same token, the increasing shift towards institutional investors will lead to major changes in how hedge fund managers structure, manage and market their products. The trend toward customization of fees and products is clearly underway, and is just one of many strategies funds are using to attract institutional investors.
The report also highlights that the majority of managers believe that pension funds will be their primary source of capital by 2020, and moreover, that public pension funds and sovereign wealth funds will represent at least 25% of capital inflows by that point in time.
Change is in the wind for hedge funds
According to the KPMG survey, two thirds of managers believe their client demographics will be less concentrated in the next five years, and just one-in-five report their client demographics will remain the same. A majority also replied they believe product diversification strategies, including liquid alternatives and customized fees, will attract more investors.
Forty-six percent of respondents say they plan to either alter their fund strategy or launch new products to bring in institutional investors over the next five years, and almost 70% report they plan to offer specialized fee structures.
A surprising 43% of respondents replied that they anticipate changing the markets in which they invest their capital. Another 21% said they would invest more into developed markets, while 30% said they had their eye on the emerging markets and 7% said they were looking at frontier markets.