06 December 2012

Hedgeweek: Funds of hedge funds must adapt business model to remain competitive, says SEI study

The report, titled: "The Evolving Funds of Hedge Funds Model: Seven Ways to Reinvention", reveals the need for FoHFs to adapt to meet evolving investor needs and business challenges, while providing insights to help them remain relevant and competitive.

According to the paper, most investors and consultants believe FoHFs have a window of opportunity to reinvent their business models to address recent dissatisfaction and disconnection with investors, as well as concerns over transparency, liquidity, and fees.

When it comes to fees, more than two-thirds of investors and consultants surveyed (68 per cent) believe they are generally too high for the value delivered. Despite the concern over fees, increased transparency and liquidity were identified as the most important factors in making FoHFs more competitive by investors and consultants. Managers believe that increased liquidity and a greater ability to generate demonstrable alpha are the most important factors in making FoHFs more competitive.

The study outlines seven areas where FoHFs can achieve the innovation necessary to change investor perspectives and become more resilient and flexible moving forward, including providing greater customisation, more concentrated or specialised portfolios, and completely revamping fee structures.

The study results suggest that despite recent struggles, many investors still believe FoHFs are a vital resource for specialised advice and expertise unavailable internally. Four in five investors see FoHFs as an ongoing component of their investment portfolios. According to the study, nearly half of investors polled (48 per cent) said the top reason their organisation invests in FoHFs is "to achieve better risk-adjusted returns". The next most cited reasons by investors were "to augment our manager selection capabilities/expertise" (44 per cent) and "to get around small portfolio size and limited organisational resources" (39 per cent).

Full article

Link to SEI report © SEI

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