As institutions invest less in traditional hedge funds, managers are considering new products to attract investors, says EY’s 2014 global hedge fund and investor survey.
After five years of focusing on transparency, cost containment, restructuring operating models and adapting to heavy regulatory burden, hedge fund managers are refocusing on growth.
“One way we’re seeing them meet these growth challenges is through seeking new capital-allocation channels,” says Joseph Micallef, financial services partner at EY. “They’re also […] offering new products in areas such as real estate, commodities, hedge funds, private equity and infrastructure.”
This could attract clients who “may not have historically invested in hedge funds,” says Gary Chin, financial services partner at EY.
However, “many [hedge funds] underestimate the costs involved with new products,” says Micallef. “Nearly one in four managers who have launched a product in the past three years witnessed a negative impact on margins.”
Launching a product requires significant investment in infrastructure, particularly technology. Managers can often leverage personnel across different product types but must invest in new risk systems and other middle-office and back-office infrastructure, particularly for regulated products.