From The Towers Watson Global Alternatives Survey 2013*
The key trends for hedge funds identified in the survey relate to both single manager hedge funds and funds of hedge funds (FoHFs). The FoHF industry continues to adjust to the new normal, with FoHFs increasingly working with investors in some form of customised or bespoke manner. Continuing downward pressure on the FoHF fees has resulted in meaningful reduction of the average manager fee rates, although the total fee burden for institutional investors remains significant.
Institutional investors continue to become more discerning about what they want from their hedge fund allocation, which is low correlation to traditional markets, greater transparency, appropriate liquidity, alignment and appropriate fees. Hedge fund managers are increasingly accommodative of institutional investors’ requirements, such that there is much less of a ‘take it or leave it’ attitude in dialogue with investors.
- In our view, there are only a small number of FoHFs that offer a credible capability so we expect consolidation in the sector to continue. This could take the form of these firms seeking partnerships or ceding ownership to a larger parent organisation that can offer broader alternative investment and global distribution capabilities.
- We expect continued downward pressure on fees with investors taking advantage of their improved bargaining position, strengthened in part by being long-term investors in the asset class.
- While the larger managers across all hedge fund strategies are generally perceived to be ‘safer’ from a business risk perspective, investors are also increasingly allocating in an informed manner to more modestly sized managers that have a proven record of alpha generation.
- continue to be a topic of discussion but in most cases the establishment of a specific share class in an existing commingled fund offers an attractive method of allocation, in particular as the managers tend to have the bulk of their net worth invested in the same vehicle.
- Investors continue to view the hedge fund portfolio as a de-correlating and diversifying allocation and we can expect strategies that offer very low correlation characteristics, as well as beta, to have prominence.
- More prominent regulatory scrutiny is likely to continue in the foreseeable future.
*The 2013 Survey covered 578 asset management firms across 5 asset types – hedge funds, private equity, infrastructure, real estate and commodities. Total AUM of the survey universe was $5.1 trillion, of which hedge funds were $1.3 trillion and funds of hedge funds were $426 billion. There were three hedge fund firms in the top 25 of all alternative asset management firms across the asset types. They were (in order) Bridgewater Associates, Blackstone Alternative Asset Management (the FoHF operation of Blackstone), and Brevan Howard.