Non-Traditional Hedge Fund Products See Explosive Growth

Non-traditional hedge fund products are rapidly on the rise, with 52% of investors surveyed by Deutsche Bank saying they invest in long-only hedge funds, alternative ’40 Act mutual funds and/or alternative UCITS.
By Jake Safane(2147484770)
Non-traditional hedge fund products are rapidly on the rise, with 52% of investors surveyed by Deutsche Bank saying they invest in long-only hedge funds, alternative ’40 Act mutual funds and/or alternative UCITS.

Of these respondents, which comprised investors from both the institutional and retail sectors globally, one-third increased their allocations over the last year, while another 43% plan to do so over the next year.

“This trend is definitely growing; hedge funds will start to play a bigger role in the asset management space. For the past two to three years, there’s been continued increase in the way hedge funds enter portfolios,” says Marlin Naidoo, Deutsche Bank’s head of capital introduction for the Americas.

Liquid alternatives in particular have seen explosive growth. Assets in alternative UCITS have increased over 300% since 2008, and assets in alternative mutual funds have had a compound annual growth rate (CAGR) of 38%, rising from $47 billion in 2008 to $238 billion by Q3 2013. Overall alternative UCITS now account for approximately 2.5% of the total UCITS industry, while alternative mutual funds account for 2% of the mutual fund industry.

“While the percentage of the hedge fund assets in the traditional world is still small, the absolute number of growth over the last two to three years is very significant,” says Naidoo.

The vehicle choice differs by investor type; based on those managers surveyed, 55% of long only assets managed by hedge funds are from institutional investors, whereas 54% of assets in alternative ’40 Act mutual funds comes from retail investors, and funds of funds and private wealth prefer alternative UCITS, accounting for 60% of assets.

The most popular product for hedge fund managers to offer is a long-only fund, with 35% of managers saying they offer this type of fund, due to client demand, signifying a shift in institutional comfort with hedge funds running the long-only portion of portfolios. Rather than looking at hedge funds as an asset class on their own, says Naidoo, investors are starting to look more at the underlying investments.

Rather than the traditional 2% management fee and 20% performance fee for hedge funds, the new structures have much lower fees. For long-only funds run by hedge funds, the median management fee is 0.88%, while the median performance fee is 8.75%. For alternative ’40 Act funds, the median management fee is 1%, though mutual funds can not have performance fees. For alternative UCITS vehicles, the median management fee is 1.5% with a 15% performance fee.

“One of the findings that was particularly interesting was the perception around why institutional investors would look to hedge funds to run a long-only product. The study found that this is due to investors looking for the right manager skills, as opposed to new hedge funds coming in and launching a product with lower fees,” says Naidoo.

For liquid alternatives run by hedge funds, lower fees are seen as a top three reason for choosing these products, but it is also not the primary focus. 53% of respondents said that increased liquidity is the main reason for investing in these vehicles, while 16% said increased transparency, and another 16% put lower fees as the top reason.

Overall, the growth of new hedge fund products looks to continue. Since 2008, 48% of managers surveyed said that over half of their new business has gone to non-traditional hedge fund products, and over the next year, investors will have more to choose from. One-fifth of managers said they plan to launch at least one of these products over the next 12 months, and another 42% are considering doing so.

«