Hedge fund managers and investors continue to face challenges arising from regulatory and cost pressures, new operational considerations and the war on talent.
A new report from EY notes that even the definition of a "hedge fund" is being tested as segments in the financial industry blur and converge.
This has presented hedge funds with a significant challenge to brand themselves and their benefits clearly in the marketplace.
Indeed, brand is critical as new assets continue to flow to top-flight managers, both in hedge funds and broader asset managers.
At the same time, startup hedge funds are enjoying strong investor demand as well.
The investor base has changed dramatically from a decade ago, when two-thirds were high-net-worth individuals. Today, institutional investors dominate.
The way in which hedge funds are sold and distributed has also changed, and digital technology and social media will accelerate the process.
The importance of the client experience has been magnified. Today, global regulators are keenly focused on hedge funds' alignment of interests with investors.
Greenwich Associates conducted 109 telephone interviews from June to September with hedge funds representing just over $1.4 trillion in assets under management. Research also included 57 telephone interviews with institutional investors representing nearly $1.8 trillion in assets, with roughly $413 billion allocated to hedge funds.
Following are five key challenges EY identified in the survey.
1. Focus on growth, but also on talent
Hedge fund managers continue to cite growth as their top priority, although the proportion of respondents who did so in 2014 fell to 57% from 67% in 2013.
New growth methods include adding new strategies, identifying new investor bases and increasing penetration with existing investors.
According to the survey, growth occurs differently with each manager depending on where it is in its life cycle. Smaller and midsize startups seek to grow their client list and penetrate more investors with their core offerings.
The biggest managers, with a large clientele and established brand, look to expand their offerings, but now focus on cross-selling products and becoming a one-stop shop for investor needs.
To execute this plan, they are hiring top talent to focus on offering new strategies through traditional hedge fund products.
EY said this was in part due to mixed operational and financial results of launching new products, but also reflected changing demands of investors who want tailored exposure that align with their investment goals.
2. Adapt to rising fees and an evolving prime broker dynamic
Hedge fund managers are starting to feel the effects of recent bank regulations.
Regulations put into place since the financial crisis — particularly those resulting from the Dodd-Frank act and the Basel III conventions — have led to increased capitalization requirements, constraints on leverage and a focus on liquidity that have affected banks' capacity and economics, resulting in an evolving shift in how prime brokers view hedge fund relationships.
Fifty-one percent of managers reported either higher fees from their prime brokers or an expectation of higher fees in the future.
