(CNS Business): A survey by consultants Ernst & Young of global hedge fund managers warns that only those who adapt to the needs of investors will see real growth in future. The 10th annual survey found that hedge fund growth has slowed for a variety of reasons, from lacklustre performance to cost concerns. In 2016 the proportion of North American investors that said they were reducing allocations to hedge funds exceeded the proportion that were increasing for the first time since the financial crisis of 2008, the survey found.
While the Cayman Islands remains one of the leading hedge fund domiciles in the world, the survey looked at the entire global industry and found investors are looking more and more for unique offerings that is satisfying a specific need. EY said managers not listening to their investors would be left behind.
Michael Serota, EY’s global leader for the firm’s hedge fund services, said growth was a top priority but managers were changing their strategies. “Amidst today’s challenging environment, it is imperative for managers of all sizes to identify the needs of their clients and align product offerings to their demands.”
In the survey, more than half of managers said asset growth was their priority, but they are also facing an unprecedented change in appetite. Almost half (48%) expect their hedge fund investments to shift from traditional hedge funds to other alternatives over the next three to five years, while 42% expect to shift from co-mingled hedge funds to customized vehicles and segregated accounts.
Some 52% of managers said they use non-traditional or next-generation data and big data analytics to support their investment process, or plan to do so in the next two to three years. The smallest managers are the most active, with 59% indicating that they use this technology.
Natalie Deak Jaros, EY Americas Co-Leader, Hedge Fund Services, said assets were flowing to the managers that offer a wide array of non-traditional products.
“Managers that do not respond to changing preferences must ensure they offer something unique to potential investors,” she said.
Hedge fund managers’ average operating expense ratio is down from last year, but investors want more cuts given the lack of performance, the plethora of lower cost alternatives and success in their own trading causing them to challenge fees hedge fund managers are demanding.
The expense ratio is down from 1.95% in 2015 to 1.84% in 2016 as investors continue to apply pressure. The declines in management fees are driving this trend as average reported fees for 2016 were 1.35%, down from 1.45% in 2015. Despite this downward trend, only 20% of investors are currently satisfied with the expense ratios of their funds.
Over 80% of investors want managers to cut middle office functions but only 18% of managers are currently or plan to do that. In the back and middle office, robotics and other automation are creating efficiencies and driving savings necessary to counteract margin compression as jobs also get cut.