Posts Tagged ‘hedge funds’

Strategic Trends for Global Asset Managers

2013-07-03 16.30.18In the years since the 2008 financial crisis, we have seen major shifts in trends influencing growth in the global asset management industry. Four key changes are significantly affecting strategic thinking in the industry:

  • A continuing movement towards bifurcation of vehicles that provide “alpha” and “beta” exposure to market returns. This isn’t by any means new news, but we feel that this is clearly understood by professional investors, but is not fully understood by most non-professional investors. The impetus to find value for fees paid will accelerate the demand for “beta” products further which will cause a sea-shift in assets. Interest in index funds and ETFs will increase even more than they have in recent years.[more…]
  • Increased volatility in the market coupled with increased difficulty in identifying uncorrelated returns will push many alternative strategies into the limelight. Expertise in global emerging and frontier markets, private equity, quant and derivatives-based strategies are becoming the core way of generating any portfolio’s “alpha”. The game is up for those managers that are trying to sell what is effectively beta as alpha.

  • A global macro context is becoming core to any portfolio strategy, including those that bill themselves as focusing on a very targeted market. Even some of the most basic fundamental domestic equity portfolios are now subject to impacts from global markets. It’s becoming less relevant to specialize in one country, region, asset class, or sector. Asset allocation is becoming a more important overlay, especially in understanding movements in correlation over time and ability to shift strategy as correlations shift. Because of massive US corporate investment in China, for instance, many funds that bill themselves as US equity-centric may actually have huge China exposure and need to be managed as such.

  • It’s becoming much more imperative to be able to clearly communicate a firm’s expertise and points of differentiation. The days of asset managers being abstract or vague about their investment philosophies are quickly coming to an end. Many hedge funds and other specialized firms will gain favor because they provide unique value propositions that are not currently offered in the marketplace. What will be critical for their success, though, is the creation of a strong, recognized brand and clear messaging about their differentiation. Additionally, they will need to develop a highly efficient sales organization that can carry that message to investors. As successful as some investment strategies are, the ability to clearly (and sometimes simply) articulate why these strategies are worth investing in is just as important. This is no small effort and should be a core part of the business strategy.

We feel that there is still significant “life” to the traditional fundamental asset management model, mostly because of the huge asset pools that sit in those strategies today and the inertia built into these. But we think that this will shift very soon and very rapidly as competition accelerates and the industry continues to consolidate and chase limited opportunities. The firms that prepare for these shift will be the ones to thrive.

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Fund Consolidation for Asset Managers

OtterYou hear a lot of fan fair when an asset manager or hedge fund decides to launch a new fund. It’s rare though to hear when a manager has to reduce the number of funds they manage, although it happens much more frequently than you think. There are four main drivers of fund consolidation:

1) Large merger or acquisition creating redundancies in product offering. With a slowdown in merger activity across the financial industry this has become rare, but if you listen to pundits recently, this may change soon.

2) Severe loss in assets under management which can make the maintenance of multiple strategies, supported by multiple teams, impractical.  While headline-grabbing fund blowups get all the attention, often simple termination of a large pension mandate or transitions of sub-advisory relationships will precipitate a change.[more…]

3) More recently, sentiment and correlation in the markets have been making many fund strategies behave and appear similar, with similar long-term performance and risk-return profiles, that may not justify maintaining them over time.

4) Many fund strategies have become irrelevant in the market place due to other low-cost options like ETFs.

Once the commercial realities have sunk in, a manager is faced with the difficult task of evaluating their existing fund offering, determining which funds will be targeted, considering the implications of eliminating the targeted funds, then implementing the consolidation.[more…]

What to Look For

Consolidation of fund offering is not as simple as ranking all the funds and singling out the worst performing ones to get rid of. The approach should be more involved. Key questions to consider are:

– How does that fund fit within the overall strategic direction and investment philosophy of the firm?

How profitable is each specific strategy? From a cost perspective, even a fund with relatively good performance, may be too expensive to maintain.

Is each fund differentiated enough in the marketplace? This question addresses how commercial the fund is and how sustainable that is over the long term.

Can assets be migrated to other strategies that achieve same objectives? As most asset managers grow, there’s a tendency towards ‘strategy creep’, where new funds emerge, new model portfolios and strategies are tested, and overtime the lines between funds blurs.

Will having fewer funds allow you to leverage fixed platform? Once downsizing is considered, there may be an opposite tendency to make radical refocusing and extreme consolidation. Managers have to make sure that what they keep can support the existing fixed platform.

Are there any significant synergies with other funds that may be at risk by eliminating a particular fund? Many specialized funds may be small, expensive, and have high variance, but consider how alpha generated with these funds feed into broader strategies.

Closing Funds

Once the funds are identified, there are a number of steps to unwind the fund entity and transition the assets in those funds, much of which are too technical for this post, but it’s important strategically to identify what options there are for directing the assets in the fund:

1) Liquidate the assets and return proceeds to the investors. Popular with hedge funds, but may not be the best strategy for more traditional funds.

2) Transfer funds to similar strategies, as long as investors approve and there are no fiduciary issues with this transfer. This is the most desirable option because the firm keeps the assets under management and associated fees.

3) Sell or transfer funds to a third party manager who may have better capabilities to manage these strategies. In some cases, the manager can negotiate a sub-advisory or distribution arrangement with the third-party manager that can be mutually beneficial.

Consolidation Strategy

Reducing the size and scope of a fund offering is typically not the most appealing strategy for an asset manager who is accustomed to growing the size and scope of their business, but in many instances it may be the most profitable and strategically imperative move in an increasingly competitive market.

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