(December 2, 2013) — Institutional investors are increasingly demanding hedge fund managers run non-traditional hedge fund products and even their long only portfolios, according to a survey by Deutsche Bank.
This trend is in line with a central change in the way investors construct their portfolios: “Investors are moving away from ‘traditional’ asset allocation in favor of a ‘risk-based’ approach,” the report said. This shift pointed to a merging of alternatives into the core portfolio, thereby encouraging hedge fund managers to step into traditional asset managers’ roles.
The result was a forging of a stronger bond between clients and hedge funds with managers branching out further for opportunities in liquid alternatives, including alternative 40 Act mutual funds and alternative UCITS funds.
Deutsche Bank found that among the 200 global institutional investors surveyed—with $1.9 trillion in total assets under management (AUM)—more than half already allocated to non-traditional hedge fund products. Of these, 36% invested in long-only strategies and another third in liquid alternatives run by hedge fund managers. A little less than half said they plan to increase their allocations over the next 12 months.
“As institutional investors become ever more comfortable with hedge funds and other alternative investment managers, they will increasingly seek out trusted hedge fund partners to help run not only their alternatives exposure, but their long only portfolios as well,” the report said.
This phenomenon was especially true for large, well-established managers: 81% of managers with more than $5 billion in AUM have already established at least one non-traditional hedge fund product.
But this idea is not new. More than three-quarters (77%) of managers reported having three years of experience managing these strategies, including 40% with backgrounds stretching more than a decade.
“Managers with extensive resources, experience and brand loyalty are well-placed to respond to growing client demand for bespoke products,” the report said.
The survey found clients’ requests were the key factor for hedge fund managers to step outside their regular roles. More than a quarter of investors reported to have asked a hedge fund to run a separately managed long-only or liquid alternatives vehicle—30% said they are considering diversifying their business.
However, managers will have to overcome the challenge of raising assets for non-traditional products, Deutsche Bank said, when moving into mainstream asset management.
Investors, on the other hand, said increased liquidity was the largest reason for investing in alternatives and regarded ‘manager skill and expertise’ as the most appealing aspect of having a hedge fund allocate their long only portfolios.
“With a variety of new growth channels, we expect hedge funds to become an ever more formidable part of the wider asset management industry in the years to come,” the report said.
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