(March 26, 2013) — “Me-too” funds, products over solutions, and plain old performance – these are the areas in which institutional investors are demanding change or hedge funds will be left for dead, a survey has shown.
Almost three-quarters of investors responding to a survey by SEI Investment Management Services (IMS) complained that there were too many “me-too” funds in the sector – some seven out of ten of them said they were looking for new ideas.
Finding a fund or approach that covered a range of objectives in an investor’s portfolio was an important factor, SEI IMS found. Rather than pitching products, fund managers would be well advised to use an interactive, problem-solving approach to match their capabilities to investors’ specific objectives, the survey results showed.
Performance, as ever, was also a major issue, with investors demanding true alpha or outperformance for the fees they paid. Just 38% of investors reported being satisfied with the performance they received for the fees, down from 62% a year ago.
Since 2003, the Hedge Fund Research Index, which tracks the universe, has lagged the S&P 500. With nearly half of hedge fund managers still charging 2-and-20 on institutional investors’ average 14.8% portfolio allocation to the sector, those paying the fees are getting frustrated.
“Investors and fund managers agree that, while the hedge fund industry’s value proposition remains intact, the hedge fund model must evolve as investor expectations increase, regulatory hurdles rise, and the competitive landscape changes,” said Philip Masterson, managing director at SEI IMS.
The industry also needs to realise that investors will vote with their feet. There has been significant ‘churn’ as hedge funds come and go with increasing frequency. From fund launches outweighing fund closures by up to two-and-a-half times (in 2005), since the bloodbath of the financial crisis, the numbers have flattened with almost as many folding as opening since 2010 SEI IMS data shows.
Other points noted by investors included hedge fund managers being willing and able to adapt to changing market conditions and investor demands. Investors also wanted to see a good marketing and communication strategy from their chosen hedge fund managers – this may feed in to the final point on size, however.
Investors continue to head for the funds that boast the largest asset pools rather than the smaller funds that usually offer better return prospects, the SEI IMS survey said.
“There is no doubt that large, well-established funds can provide a level of comfort and confidence that many investors are unwilling to give up, even if it costs them an increment of performance,” SEI IMS’ report said. “And with their jobs and reputations at stake, why would investment consultants risk recommending a fund that can’t check every box in RFPs and DDQs, let alone one whose process and strategy aren’t fully evolved? As the adage goes, ‘Nobody gets fired for buying IBM’. The more institutionalised the hedge fund industry becomes, the more gatekeepers and decision-makers are inclined to play it safe.”
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