Hedge Fund Capital Raisers Unruffled by Competition
Encroaching mutual funds and tighter regulations haven’t dampened the confidence of hedge fund managers in their ability to raise capital.
More than half of hedge funds expect pensions to increase their exposure to the asset class, according to a survey by State Street.
Of 235 professionals questioned, 55% said they expected more money to be invested in hedge funds over the next five years, primarily due to“performance challenges” to other asset classes. More than 60% expected the broader institutional investor space—including insurers and sovereign wealth funds—to allocate more capital.
“Nine out of 10 industry professionals believe hedge funds will be required to more clearly demonstrate their value to prospective investors.” —State StreetAfter a bruising year for the hedge fund industry—in which performance declined and major investors withdrew large allocations—it appears managers are not taking it lying down.
Nine out of 10 of those surveyed by State Street said hedge funds would need to “clearly demonstrate their value to prospective investors”if they were to capitalise on what is seen as a growing appetite for hedge funds.
Regulation was cited as the chief headwind for hedge funds, with the impact of directives such as Basel III yet to be ascertained. Basel III is aimed at reducing systemic risk in financial markets but could make it more costly for hedge funds to use prime brokers. Although 42% of respondents were confident it would not hurt their businesses significantly, 29% said the directive would increase costs and 29% were unsure of the impact.
In addition, hedge fund managers predicted increased competition for assets from mutual fund strategies.
Under UCITS III regulations in Europe, several types of hedge fund strategies have become available to institutional and retail investors through a more regulated structure. State Street’s survey found that half of respondents believed these products would take more market share from“traditional” hedge funds.
The confidence of hedge fund managers was reflected in separate research from Cerulli Associates. Surveying the broader fund management industry, the company found asset managers were boost investment in product development and distribution following a period of low activity in the wake of the financial crisis.