Managers’ resilience points to a bright year ahead

What a tumultuous year 2016 was. Who could ever have predicted it? A new US President elected with approximately 5% fewer votes than his opponent, a Dow Jones approaching the heady heights of 20,000 and practically every article about the alternatives industry having some negative connotation. How scary is that for all of us in the industry? 

Funds return to growth

So, what is going to happen in 2017? Based on what we see, not all is doom and gloom. In the past two quarters the industry has been resilient, posting positive returns. In December 2016, the net outflow of funds was lower than over the same period in the past two years – when measured as a percentage of assets under administration. 

More importantly, managers realise that they have to justify their existence. They are proactively re-examining their fees. Many are more than willing to trade reduced fees for more permanent capital or the right capital. Managed accounts with negotiated fee arrangements covering clawbacks, hurdles or a derivation thereof are becoming commonplace. The days of 2% (annual management) and 20% (performance) fee structures have long since been consigned to the annals of hedge fund lore.

A maturing industry

All this change makes Citco’s upcoming Hedge Fund Distribution Trends Survey (see page 3) particularly timely. It is striking that the industry professionals surveyed felt confident about the industry’s future growth despite the inevitable consolidation that is occurring. It feels like we are moving to a very mature industry. 

What is also clear to the industry’s service professionals is that managers really want to focus on managing their clients’ money. They are looking to move away from running large back offices. They view this as an area that they can outsource to a variety of service providers. 

Each discussion we have with clients is different. It is all a matter of how comfortable the manager is with giving up geographical access to the team supporting them. There is a growing appreciation among managers that third-party providers can support their day-to-day needs. 

The manager will need to retain people in-house to support their front office, on-demand requirements. But they appreciate that there is plenty of scope for third-party support to free managers to focus on what they are paid to do – manage their clients’ investments. 

2017 – here we come.

8th March 2017

Our contacts

Kieran Conroy

Kieran Conroy

Head of Hedge Fund Services

T+1 416 969 3900
Ekconroy@citco.com