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The Next Alternative: Thriving in a Fund New Environment

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The alternatives industry has changed drastically since the turn of the 21st century, and there's no sign of it slowing down. The role of institutional investors -- and the sophistication of these …

The alternatives industry has changed drastically since the turn of the 21st century, and there's no sign of it slowing down. The role of institutional investors -- and the sophistication of these investors -- in the hedge, private equity and real estate sectors is transforming the industry. Learn More >> http://www.statestreet.com/ourbusiness/

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  • 1. 11 ALTERNATIVES ALTERNATIVES State Street 2013 Alternative Fund Manager Survey Executive Summary September 2013
  • 2. 22 ALTERNATIVES State Street 2013 Alternative Fund Manager Study • In July 2013, State Street conducted a survey of 391 leading alternative asset managers in collaboration with Preqin, a leading source of data and intelligence for the alternative fund industry. • Managers provided their insights on current challenges, priorities and opportunities across the industry, as well as their predictions for the future. • Additional analysis is sourced from Preqin’s database, covering more than 30,000 funds managed by 15,000 alternative asset managers, as well as 11,000 institutional asset owners such as pension funds, insurance companies, endowments and foundations. About the Research 55%29% 10% 6% Respondents by Location North America Europe Asia Pacific Other 48% 25% 15% 12% Respondents by Type Hedge Funds Private Equity Real Estate Diversified
  • 3. 33 ALTERNATIVES Drivers of Change • Investor demands are at the forefront of managers’ minds. More than half (52 percent) of managers rated investor demands for greater transparency around risk and performance as a top driver of industry change. • Investor demands around fees and greater liquidity also factor highly as key causes of change. • Advantage rests with the managers who are attuned to the needs of this increasingly sophisticated investor base and can tap into it with innovative, targeted products. As the alternative fund management industry continues to grow in both size and complexity, institutional investors are becoming more sophisticated and demanding. Source: State Street 2013 Alternative Fund Manager Survey Top Five Drivers of Change in the Alternative Funds Industry 52% 36% 35% 33% 31% 0% 10% 20% 30% 40% 50% 60% Investor demand for greater transparency in risk and performance Increased regulatory scrutiny of alternative funds Investor demand for more favorable fees Investor demand for greater liquidity at fund level Increased manager competition for limited pool of assets Note: Respondents could select up to three answers. Only the top five responses are shown.
  • 4. 44 ALTERNATIVES Evolving Strategies Create Competitive Edge • The rise of separately managed accounts is evidence of managers’ efforts to respond to investor demands for transparency and liquidity. More than one in four have introduced managed accounts since 2008, and another 18 percent plan to do so over the next five years. • Managers continue to address gaps in their investor offerings by adding investment strategies and expanding into new regions. • In the face of fierce competition for investor capital, many managers are finding that flexibility in fees can mean the difference between hitting or missing their fundraising targets. Managers are evolving with investors, refining their product and investment strategies and adapting to a new standard of success. 26% 25% 22% 15% 14% 8% 8% 7% 18% 29% 12% 15% 18% 8% 5% 10% Offer managed accounts Add new investment strategies with in-house resources Change our fee structure Enter joint ventures with investors Expand into new regions Offer UCITS funds Offer funds with shorter lifespans Add new investment strategies by acquiring another business Product and Investment Changes Made Since 2008 or Planned by 2018 Introduced this change since 2008 Plan to introduce this change over next five years Source: State Street 2013 Alternative Fund Manager Survey
  • 5. 55 ALTERNATIVES Operational Excellence With a Spotlight on Risk • When asked what risk and operational changes they had made since 2008, the largest proportion of all groups of alternative asset managers stated that they are reporting more information on investment holdings, risk and performance to investors — and more frequently. • Surprisingly few managers report having purchased or licensed new software to upgrade their investment operations technology (17 percent) or using new techniques to assess their performance and risk, post-crisis (15 percent). Some acknowledge gaps in their existing capabilities, including weaknesses in reporting software and a lack of integration between their Order Management System and risk platforms. Managers should make sure that quality keeps pace with quantity when managing ever-escalating demands for integrated risk and performance data. Source: State Street 2013 Alternative Fund Manager Survey 44% 32% 24% 22% 17% 15% 13% 16% 8% 4% 5% 16% 9% 6% 0% 10% 20% 30% 40% 50% Report more information to investors Report more frequently to investors Reduce amount of leverage we employ Use an independent administrator Purchase/license software to upgrade inv. ops technology Use new techniques to assess performance & risk Use an independent provider of performance and/or risk analytics Risk and Operational Changes Made Since 2008 or Planned by 2018 Introduced this change since 2008 Plan to introduce this change over next five years
  • 6. 66 ALTERNATIVES Competing in an Uncertain Regulatory Environment • Among fund managers, widespread frustration with regulation persists, although others see only opportunity – to distinguish themselves from their peers and gain a fundraising advantage. • Among investors, opinion is divided on how beneficial new regulations are for the industry – Private equity investors most strongly believe that the regulations are not beneficial, citing reduced fund choices and increased costs as possible detrimental effects. – In comparison, 35 percent of hedge fund investors view recent regulations as beneficial to the industry, as they provide transparency and consistency. • A large proportion of both managers and investors are unsure of the impact regulations will have. Although burdensome for managers, the new era of heightened regulation is also creating opportunities. Source: Preqin database, accessed August 2013 43% 40% 52% 22% 41% 26% 35% 19% 22% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Hedge Fund Investors Private Equity Investors Real Estate Investors Institutional Investors' Assessment of Alternative Industry Regulation Regulations are beneficial to the industry Regulations are not beneficial to the industry Unsure
  • 7. 77 ALTERNATIVES The Next Alternative: Thriving in a New Fund Environment • Fundraising ranks as the most urgent challenge for alternative managers over the next five years, with 82 percent citing this a top challenge, followed by generating performance at 54 percent. • Managers are optimistic about the future. Of the 86 percent who expect their costs to increase, three-fourths (75 percent) don’t feel their growth will be constrained as a result. • The alternatives industry continues to expand in terms of both size and diversity. Fifty-eight percent of managers expect appetite for hybrid fund structures to increase over the next five years, which will require managers to ensure they have the necessary infrastructure to support these vehicles. Despite the increased pressure they are facing from multiple directions, alternative fund managers are optimistic about what the future holds. Source: State Street 2013 Alternative Fund Manager Survey 82% 54% 38% 20% 18% 0% 20% 40% 60% 80% 100% Fundraising Generating performance Adapting to regulation Preserving margins Fulfilling investor demands Top Five Challenges Predicted by Alternative Managers Over Next Five Years CORP-0853

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