As alternative investments grow in popularity, hedge fund managers may find themselves under greater performance pressure.
Globally, 48% of institutional investors expect to shift their investments from traditional hedge funds to alts over the next three to five years, reveal an EY survey.
“Hedge funds are experiencing slow growth globally,” says Fraser Whale, EY’s Canadian alternative funds leader. “With an abundance of low-fee investment options and savvy investors pushing for fee transparency, we’re seeing a bit of a fight for growth in Canada, too. Investors have more options than ever in the alternatives marketplace, and fund managers really need to deliver on their investors’ concerns to stay competitive.”
That means capitalizing on technology, reducing costs and developing talent.
More than half (52%) of managers globally use non-traditional or next-generation data and big data analytics to support their investment process, reveals the report — or they plan to do so in the next two to three years. The smallest managers are the most active users of tech (59%).
Despite expense ratios of 1.84% in 2016, down from 1.95% in 2015, institutional investors think costs can be improved. Cost-cutting ideas: make reductions in the middle or back office, outsource or use robotics and automation.
Further, institutional investors want details on hedge funds’ talent management programs. In fact, a full 75% of them use this information as a key consideration in their due diligence.
The survey also found that 55% state their primary allegiance is to their portfolio managers, not to firms. Therefore, attracting and retaining top talent is key to retaining clients.
Read the full survey here.