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The Evolving Dynamics of the Hedge Fund Industry Strategic priorities — achieving growth EXTRACTED FROM EY’S 2015 GLOBAL HEDGE FUND AND INVESTOR SURVEY


D


uring 2015, the hedge fund industry continued its evolution, where common goals are not only maintaining, but


growing market share in the face of a number of different challenges. Growth ambitions are certainly nothing new; however, we are finding that managers increasingly view growth as a necessity to counter many headwinds that are disrupting their traditional business model. The level of AUM necessary to thrive is not only higher than what would have been necessary in the past, but the timeline to achieve these critical thresholds is shorter than ever. Additionally, the need to attract and retain top talent is paramount to success. The good news is that asset flows to the industry remain healthy; however, competition for these assets is stronger than ever as managers compete to satisfy investor expectations for products, exposures and outcome-based solutions.


Strategic priorities of an evolving industry A majority of managers remain focused on asset growth as a strategic priority; however, those citing it as the top priority dropped significantly compared to 2013 when three out of four managers reported asset growth as the top priority. This reduction is partially driven by the success of the largest managers having implemented their growth strategies, whereas those mid-size managers with $2 billion to $10 billion of assets under management are still playing catch-up. Achieving growth remains a complicated proposition on account of increased competition, evolving investor demands and operating model constraints/margin considerations.


Fig.1 Hedge Funds’ Strategic Priorities


Strategic priorities Please rank the following in order of strategic priority to the firm.


Asset growth by size


Over $10b


47%


19%


14%


Asset growth


57%


20% 10%


$2b — $10b


70%


15% 7%


Talent management


24%


32%


22%


Under $2b


48%


30%


11%


Operational efficiency


Succession or monetisation


event/strategic alliance 3% First priority Second priority Third priority


17%


39%


28%


6% 20%


With their asset growth goals within reach, a higher proportion of the largest managers — one in three — noted that talent management is their new top strategic priority. They are seeking ways to attract and retain the best talent, not only in the front office where the pursuit of top investment talent remains paramount, but also in the back and middle office functions. This trend mirrors other industries (i.e., technology) where major firms differentiate themselves in their ability to identify, train and maintain top talent.


Divergence in approaches to achieving growth Growth can be achieved in a variety of fashions, and we find that managers tend to take different approaches based on their current size and point in their life cycle.


The smallest and mid-size managers are increasing their focus on accessing new investor bases. They are looking to expand their appeal beyond their core traditional hedge fund investors who generally have supported them from their launch date.


“In order to continue our growth, we need to retain and continue to hire top talent. We’re not looking for people with experience but rather people with potential. We are all competing for the top talent so it boils down to: do they join you or do they join them?” (OVER $10bn, NORTH AMERICA, MULTI-STRATEGY)


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The largest managers, already having established a large clientele and brand in the market, are now focused on cross-selling products and becoming a “one stop shop” for investor needs. In prior years, this meant launching non-traditional hedge fund products. It appears that there may be less of an appetite to offer these non-traditional products as all participants highlighted a significant drop in new product launches. The largest managers are shifting their focus to offering new strategies. To execute this plan, they are not only hiring top talent to focus on offering new strategies, they are also driving consolidation of smaller managers.


Investor appetite for alternative products exists; however, traditional hedge fund managers are challenged by other market participants In past years, managers identified new product development as the pathway to reaching new investors and growing AUM. Many hedge fund managers are finding challenges in this space as


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