In 2015, while smaller hedge funds are expected to outperform larger managers, they will face more pressure to retain and grow assets, which is an area where service providers can add value, according to Don Steinbrugge, managing partner at hedge fund consultant and marketing firm Agecroft Partners.
As the service provider space becomes more competitive, says Steinbrugge, those that offer additional services that their competitors don’t offer are the ones that will gain market share.
For example, he sees services providers provide consulting broader than what their area of focus is to their clients, as well as putting on client conferences to educate their clients. Aside from just educating, though, these conference can really be value-added if they help with marketing, such as when an administrator puts on a conference where they invite investors and have hedge fund clients present to those investors.
“The vast majority of assets are controlled by a small percent of hedge funds,” says Steinbrugge. “The ones that don’t have all the money are struggling and are looking for ways to expand their business. So anything [service providers] can do from a marketing standpoint, their client base is going to view it as value added.”
This value-add of helping their clients raise assets are the most important service right now for hedge funds, say Steinbrugge.
“For example, with prime brokers, many investors are choosing prime brokers based on their capital introduction services. A lot of the other services are generic. So the money is going to the prime brokers with the strongest brands and also those that can help generate business for the hedge fund.”
This need to raise assets comes at a time when the cost of business is going up and hedge fund fees are coming down, putting a squeeze on these smaller managers. As a result, Steinbrugge thinks the number of funds that close will go up in 2015, particularly as their looks to be increased volatility.
“Increased volatility tends to lead to a larger dispersion of returns of managers in a specific strategy, which leads to the poor performing ones being fired…The market’s becoming more competitive.”
Steinbrugge also thinks the Alternative Investment Fund Managers Directive (AIFMD) is hitting smaller managers disproportionately hard, and this trend will continue in 2015.
“I think you’re going to see a significant reduction in marketing in Europe for small and mid-size hedge funds that don’t have the resources to invest in each individual country there, and I don’t think that will change until managers are able to register across all of the EU with one registration.”
For the industry as a whole though, Steinbrugge does see some bright spots in 2015, and overall, assets will rise.
“This will be fueled by a combination of investors moving assets out of long only fixed income to enhance forward looking return assumptions and other investors shifting some assets out of the equities to hedge against a potential market sell-off,” he says.
In all, he predicts a rise of 7% over the $3 trillion mark, derived from a 2% increase in net asset flows and a 5% increase in performance.
As the service provider space becomes more competitive, says Steinbrugge, those that offer additional services that their competitors don’t offer are the ones that will gain market share.
For example, he sees services providers provide consulting broader than what their area of focus is to their clients, as well as putting on client conferences to educate their clients. Aside from just educating, though, these conference can really be value-added if they help with marketing, such as when an administrator puts on a conference where they invite investors and have hedge fund clients present to those investors.
“The vast majority of assets are controlled by a small percent of hedge funds,” says Steinbrugge. “The ones that don’t have all the money are struggling and are looking for ways to expand their business. So anything [service providers] can do from a marketing standpoint, their client base is going to view it as value added.”
This value-add of helping their clients raise assets are the most important service right now for hedge funds, say Steinbrugge.
“For example, with prime brokers, many investors are choosing prime brokers based on their capital introduction services. A lot of the other services are generic. So the money is going to the prime brokers with the strongest brands and also those that can help generate business for the hedge fund.”
This need to raise assets comes at a time when the cost of business is going up and hedge fund fees are coming down, putting a squeeze on these smaller managers. As a result, Steinbrugge thinks the number of funds that close will go up in 2015, particularly as their looks to be increased volatility.
“Increased volatility tends to lead to a larger dispersion of returns of managers in a specific strategy, which leads to the poor performing ones being fired…The market’s becoming more competitive.”
Steinbrugge also thinks the Alternative Investment Fund Managers Directive (AIFMD) is hitting smaller managers disproportionately hard, and this trend will continue in 2015.
“I think you’re going to see a significant reduction in marketing in Europe for small and mid-size hedge funds that don’t have the resources to invest in each individual country there, and I don’t think that will change until managers are able to register across all of the EU with one registration.”
For the industry as a whole though, Steinbrugge does see some bright spots in 2015, and overall, assets will rise.
“This will be fueled by a combination of investors moving assets out of long only fixed income to enhance forward looking return assumptions and other investors shifting some assets out of the equities to hedge against a potential market sell-off,” he says.
In all, he predicts a rise of 7% over the $3 trillion mark, derived from a 2% increase in net asset flows and a 5% increase in performance.
Service Providers Can Help Hedge Funds With Marketing
In 2015, while smaller hedge funds are expected to outperform larger managers, they will face more pressure to retain and grow assets, which is an area where service providers can add value, according to Don Steinbrugge, managing partner at hedge fund consultant and marketing firm Agecroft Partners.