13 November 2013

Hedgeweek: Static allocations may foil growth ambitions of hedge funds

EY’s survey  Exploring Pathways to Growth shows that while managers want to grow their assets under management through new products and distribution channels, investors do not necessarily plan to increase allocations to hedge funds and are not interested in buying multiple products from one manager.

Art Tully, EY’s global hedge fund services co-leader, says: “Managers are investing heavily to promote growth, expanding into new strategies and products such as institutional long-only offerings and registered funds. They are also devoting more resources to operational infrastructure in order to scale that growth. The largest managers are making the bulk of these investments, and for now they appear to be reaping the rewards, attracting the majority of the industry inflows. But, the growth ambitions of managers may not be matched by sustained investor appetite.”

Managers attribute increased costs to developing infrastructure to meet demands of regulatory reporting, upgrading technology and scaling the business to service growing assets. To date, regulations have primarily served to add costs to the system — costs that are being borne by investors and managers, but have provided minimal benefit to the due diligence process or to minimise any concerns of systemic risk. In fact, over two-thirds of investors say that regulations have had no impact on their due diligence process for vetting investments. Investors and managers are more aligned than in the past in their expectations for the future. Both expect increasing regulatory intrusions and accompanying costs.

Investors agree that the front office is most important, but are more discriminating than managers in what they deem important to shadow. Trade reconciliation and investment valuation are most important, while a number of back-office functions, including partner/shareholder accounting and investor reporting are not. Yet, nearly half of hedge funds fully shadow these latter functions. 

Increased polarisation in the industry is more evident than ever, with the largest funds succeeding because of their size and scale and their ability and willingness to invest in the business, and the smallest by virtue of simplicity. In particular, the largest and smallest managers have the most efficient headcount ratios between front-office and back-office personnel – the largest because they have been able to achieve economies of scale and the smallest because they cannot afford to be inefficient.

Full article

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