The following guest post is courtesy of Diane Harrison who is principal and owner of Panegyric Marketing, a strategic marketing communications firm founded in 2002 specializing in alternative assets.
Looking to the past as a way to gauge the likely direction of the future is a popular exercise in the first quarter of every year. It’s a natural desire for people to want to improve on their personal and professional lives; taking stock of where they are, making changes where needed, and reinforcing good habits. Alternatives managers are no different, and despite some opposing opinions, are people too.
THE MORE THINGS CHANGE, THE MORE THEY STAY THE SAME—Jean-Baptiste Alphonse Karr
Industry analysts throughout the financial markets annually capture these sentiments in surveys, providing investment managers a blueprint with which to plan some needed changes. Ernst & Young’s 2016 Global Hedge Fund and Investor Survey offers an interesting snapshot into investor’s attitudes at the close of 2016: Differentiation has become the touchstone of the future, and those funds that strategically embrace change for the right reasons and modify their business model in a way that responds to investor demands will be the ones that prosper going forward. While the survey is comprehensive, covering a wide range of topics and opinions, the five areas selected below provide managers with key issues to take stock of in 2017.
ALTERNATIVES ARE STILL IMPERATIVES
EY survey: Almost half of investors are continuing to actively seek out non-traditional products.
Although not shy in voicing their frustrations and disappointment with most alternative products, investors are nevertheless more committed than ever to being invested in the sector. Perhaps they have finally truly embraced the mantra of diversification and risk modification these products are meant to provide to portfolio management. While they still want to see wholesale improvements within alternative offerings, they are believers in the long-term allocation process, and managers must work to win them.
MORE OF SAME IS KISS OF DEATH
EY survey: Managers are facing the imperative to differentiate not only from one another, but from the growing number of alternative products that are available.
Over the past few years, investors have seen a growing array of products designed to fit the “non correlated” category of alternative investments. While alternatives managers have always sought to excel over their peers within a particular approach or sector, now these managers must additionally consider how their fund or approach stacks up versus other forms of alternative products—mutual funds, ETFS, etc.—that are vying for a share of the alternative investor portfolio. The pressure to offer uniqueness to each investor, from retail to institutional, has been increasing with the growing smorgasbord of alternatives product development. For managers in 2017, it pays to be an outlier.
THE BIG BOYS STILL WILL GET THE MOST PLAY TIME
EY: Investors desire to co-develop specific vehicles – those that provide the investor everything from unique fees to individual transparency and portfolio exposures – which falls squarely in the sweet spot of the largest managers. While just 40% offered funds with customized fees and terms in 2015, 2016 saw that spike to 63%.
The asset flows have for years been moving uphill to the largest managers, and 2016 was no exception. Greater fee income helps the biggest funds maintain and continue to build out the infrastructure, regulatory, and technological development necessary to keep pace with industry demands. It also allows for these managers to innovate and bring to market new products tailored to address investors’ desire for customization. Smaller managers face much greater pressure to compete as they struggle to fulfill all their obligatory requirements with tighter budget constraints.
MAKESHIFT WILL NOT CUT IT
EY: Investors have clearly communicated that they will not compromise in their expectations that managers have robust infrastructures to support their business.
While investors and managers can agree that high quality infrastructure is costly and getting more complex each year, investors are not willing to give smaller managers a pass on complying with the full panoply of compliance that they demand from institutional-sized fund managers. Outsourcing as much of the service functions as possible remains a popular tactic for smaller managers to attempt to keep pace with their larger counterparts. However, this practice must be balanced against investors’ continued concern over the loss of control outsourcing key functions presents to the business. And investors are united and clear in their desire that the cost of increased infrastructure is not one that will be borne by them through additional fee income.
MERITOCRACY TRUMPS DEMOCRACY
EY: Talent management now plays a critical role in the competition for institutional assets, with 75% of investors indicating it is a key element in their due diligence process.
What goes around comes around in terms of human capital. Despite a tease from the next generation in investing, automated robo-advisors, the vast majority of investors keenly value access to industry trading “stars.” As other arms of the financial world continue to lure these “stars” away to work in startups and venture capital, managers with enviable trading talent are highly focused on keeping these individuals with their firms. The need to incorporate long-term retention management tactics that can aid in this effort is a core goal for managers across the asset size spectrum, although an increasingly difficult one.
LISTEN AND LEARN
As investors mature in their acceptance and use of alternative investments, they are better equipped to voice their concerns about the gaps and shortcomings they perceive to be hindering the sector as a whole. The issues referenced above are just a small piece of the investor satisfaction mandate managers must focus on in the coming year. Further, these changes aren’t necessarily new—investors are merely turning up the heat on the demands for change they’ve been making for years. Ignore them at your own peril in 2017…