Hedge fund survey reveals industry innovation

It is no secret that hedge funds face a challenging fundraising environment. The industry is at an inflection point, with muted performance continuing for many and pressure growing from investors for a better alignment of interests with regards to the fees they pay.

At the same time there are an increasing range of structures for managers to utilise when looking to raise capital and myriad distribution options for funds attempting to tap into investors across the globe.

Against this backdrop, Citco Fund Services and HFM Global have undertaken an extensive survey of 223 global hedge fund managers to get a sense of the challenges and opportunities investment management firms see in the current climate. 

The responses were gathered during the last quarter of 2016 from firms running a diverse range of strategies and are dominated by those with $1bn or more under management. 

The findings offer unprecedented insights about how different hedge funds are faring in fundraising terms. They also reveal firms’ preferred – and most effective – methods of raising money.

The full report will be published in February, but in this article we can reveal a number of key findings. 

Rise of managed accounts

Our research reveals how managed accounts have become the engine of industry growth in recent years as institutional investors in particular demand more transparent asset structures. For 19% of global hedge fund firms these vehicles are now the biggest source of new inflows, with this rate rising to 28% among US managers.

The data also sets out how far hedge funds are looking to branch out into new strategies, with 41% telling us they will be starting a new fund this year. Long/short equity and managed futures funds appear to be the most popular among existing managers looking to grow and diversify their product range. 

US managers are most innovative

Innovation is a key theme of this research. Nearly three-quarters of respondents say they are experimenting with new fund structures to attract investment. This figure rises to 78% among managers in the US. 

Big funds are getting bigger as the concentration of assets among the largest managers continues. These firms are also the most bullish about future growth, often through a diversified strategy involving hedge funds, private equity and real estate. It’s clear that these firms are evolving from pure hedge funds into true asset managers. 

Pension funds remain largest allocators

Despite a number of large US public pension funds withdrawing from hedge funds or cutting back on exposure, this section of the investor community continues to be the main source of inflows for big managers.

Among $1bn-plus firms, pension funds were the largest allocator for 40% of managers, compared to an overall average of 27% of global funds seeing them as their biggest investor. This underlines how pension fund money is still flowing primarily to the biggest names. 

Small managers may feel excluded from this important source of capital, but that may change given the poor performance or capacity issues experienced at many large shops. 

Liquid alts take up stays slow 

Liquid alts structures in the US have so far failed to live up to the hype of a few years ago, although alternative Ucits vehicles in Europe are popular. Only 8% of respondents currently have a liquid alts structure, but 14% are planning to launch one.

Interestingly, appetite was stronger in the US, which has seen a slow burn of liquid alts money in recent years, with 26% of managers looking to launch such funds, compared to 12% in the UK. By strategy, global macro managers were most keen, with a third of such firms revealing plans to start a liquid alts fund.

On 23 February, Citco and HFM Global will release the full Hedge Fund Distribution Trends Survey 2017 and we’ll make sure you get a copy. We will also be running breakfast events in London on 23 February and in New York on 1 March to debate the findings with a range of industry experts.