Posts Tagged ‘investment management’

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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