Investor Demand Driving Alternative Investment Changes

The Next Alternative: Thriving in a New Fund Environment, conducted jointly by financial services provider State Street and research consultants Preqin, found fund managers see investor demands for greater transparency, more favorable fees and greater liquidity at the fund level as three of the top five drivers of change over the next five years.

“Alternative asset managers that want to create a competitive edge need to balance meeting new requirements from investors and regulators while ensuring operational and performance excellence,” said George Sullivan, executive vice president and global head of State Street’s Alternative Investment Solutions. “The mainstreaming of this asset class debunks common misconceptions that have hindered opportunities for investors and fund managers alike.”

First among these common misconceptions is that alternative fund managers have been reluctant to offer greater transparency into fund performance and risk. In reality, the survey found, managers are reporting more information to investors, more frequently. Forty-four percent of fund managers have increased the amount of information they report on their holdings, risk and performance since 2008 and an additional 16% plan to do so over the next five years.

Nearly one-third (32%) have increased their reporting frequency since the financial crisis. Capturing, structuring and reporting data “on demand” for stakeholders will give managers a clear advantage as investor demand for greater transparency in risk and performance was the most cited driver of change in the alternative fund industry today, State Street said.

Second among the misconceptions is that the era of major change in the alternative sector is largely finished. In reality, the survey found growing competition means alternative fund managers are reassessing their fee structures and seeking ways to differentiate their offerings with new product and investment strategies. Twenty-nine percent of alternative fund managers surveyed indicated they plan to add new investment strategies with in-house resources over the next five years, while 25% said they have done this since 2008.

Third among the common misconceptions is that the alternative industry regulation is stifling growth and innovation. Although burdensome for many, the survey found heightened regulation is also creating opportunities for managers to distinguish themselves from peers and tap into an investor appetite for increased transparency and oversight. Of the 86% of alternative fund managers who expect their costs to increase over the next five years, largely driven by regulation, 75% are optimistic this will not constrain their growth potential.

“This survey highlights key changes that are coinciding with the growth and maturation of alternatives as an asset class and offers a glimpse into what the next five years will look like for the industry,” said Sullivan. “Managers who remain innovative as they respond to demands from investors will be positioned for success in this new era where investors will look to employ alternatives more commonly than ever before.”

Other findings of the survey included:

• Nearly one in five fund managers (18%) plan to expand into new regions by 2018;
• More than one in four (26%) have introduced managed accounts in the past five years, and another 18% plan to do so by 2018;
• A majority of respondents (58%) said hybrid alternative fund structures, which blend features of traditional hedge fund and private equity vehicles, will increase over the next five years; and
• Ten percent of fund managers plan to acquire another business in the next five years, compared with 7% who have already done so in the past five years.

The joint survey questioned nearly 400 leading alternative fund managers from hedge funds, private equity firms and real estate funds.

More information about the survey can be found here.