(September 18, 2013) — Alternative asset managers are being forced to step up their game due to the increasing sophistication of institutional investors, according to research from State Street.
Hedge funds, private equity houses, and real estate managers are having to transform at a significant rate, not just to keep up with new regulatory burdens but also with their investors’ demands, according to the report.
The top driver of change in the industry, as voted by alternative fund managers, was the investor demand for greater transparency in risk and performance, followed by the increased regulatory scrutiny of alternative funds.
The data, compiled in association with Preqin, saw almost 400 alternative managers questioned. From the research, five key future trends were highlighted.
These are: that performance is paramount; regulation is reshaping their business; competition for capital will continue to intensify; there is a new focus on operational excellence, and; data will become a key differentiator.
The survey found 82% of alternative fund managers believed fundraising would be their biggest challenge over the next five years, followed by generating performance (54%), and adapting to regulations (38%). Preserving margins (20%) and fulfilling investor demands (18%) also concerned the managers.
To help cope, 54% of alternative fund managers have, or are planning to add new investment strategies with in-house resources, and 30% have or will consider entering into joint ventures with investors.
In addition, 14% plan to invest in new regions in the next five years, and 22% are considering changing their fee structure.
Investor relations are also proving hard for smaller boutiques: the research claimed most investors gravitated towards larger fund managers who can provide scale and offer institutional-quality investment practices, such as advanced reporting for transparency in risk and performance.
Investor demands are also driving up operational excellence, forcing fund managers to find new efficiencies, the report said.
Managers are looking to develop their back office capabilities, increase reporting operations, and strike the right balance with cost structures, by keeping some client performance costs fixed for example.
The report concluded: “While it’s certain the alternatives industry will continue to transform over the next five years, several factors remain uncertain. Alternative fund managers who balance a flood of new requirements—from investors and regulators—with operational and performance excellence will stand apart from the rest.”
The full report can be read here.
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