SEI Study: Hedge fund managers face tough business climate and heightened investment expectations

26 March 2013

A new study conducted by SEI in collaboration with Minard Capital LLC finds that hedge fund managers must rethink their business models, provide tailored solutions, and offer multi-faceted client communications.

This amidst a climate in which investors are heavily scrutinising the industry’s value proposition. SEI’s insights are based on the company’s sixth annual global survey of institutional investors, as well as insights from nearly 50 hedge fund managers, investors and consultants who participated in roundtable discussions in New York and London organised and moderated by Minard Capital.

“With an increasingly crowded field of competitors, rising institutional demands, and a decade of disappointing overall returns, hedge funds are at a critical juncture”, said Ross Ellis, Vice President, Knowledge Partnership for SEI’s Investment Manager Services division. “Based on what we heard from institutional investors and fund managers, it’s time for the industry to make an evolutionary leap in proving its worth to a hungry yet hesitant investor base.”

“Success in identifying, securing and retaining institutional and private client assets today requires new tactics. These include a defensibly true and transparent investment process and a competitive edge that is verifiable internally and corroborated by the investor”, said Rachel SL Minard, Founder and CEO of Minard Capital. “Managers must know how to defend their edge against competitors, investment instruments, and vehicles investors now have at their disposal to meet their risk/return targets.”

The 48-page report, “6 Ways Hedge Funds Need to Adapt Now,” identifies key challenges hedge fund firms must meet if they hope to succeed in the long term, i.a.:

• Registered products are making inroads into the institutional market, especially among smaller investors, as well as offering retail and retirement market opportunities.
• Institutional clients are increasingly sensitive to how much true alpha they are getting for the fees they pay, and also worry about “diversifying away alpha”.
• Client communication provides an ongoing opportunity for funds to differentiate themselves; our survey shows risk management is one of the areas where investors want more understanding of hedge fund methods.

“No longer is it enough for hedge funds to offer investment products and capabilities. Investors now are seeking multi-faceted solutions, strategies that cannot only deliver attractive returns with low volatility but also help address a variety of portfolio issues from high correlations and limited liquidity to the matching of returns with liabilities. Hedge funds are being challenged to function as the ‘Swiss army knife’ in investors’ toolkits”, says the survey.

Press release with link to report

Further reporting by Risk.Net (subscription), 2.4.13 © Incisive Media Investments Limited

© SEI