RESEAR CH
increased demand for customised solutions. Managers are at a crossroad and need to ask themselves whom they want to be. Should they choose to continue down this path, they will need to invest in people, infrastructure and brand. The investors will continue to evaluate whether managers can compete and meet their evolving requirements.
Product diversification helped managers commercialise, but it did not come without challenges The largest managers were at the forefront of new product development. This has fueled their ability to transform from a standard hedge fund to a broader asset manager. However, they are now dealing with the ramifications of this expansion.
While offering new products was positive for investor interest and brand recognition, managers underestimated the bottom-line impact as there is a significant drop-off in margin satisfaction and an even heavier toll on the managers’ talent. This may be a reason for the decline in new product development.
Thus, managers need to find a balance when launching new products — they may be successful in increasing AUM, but have questionable financial implications and strain the team supporting the products. This conundrum is challenging managers to question their current operating model and the investments needed in key areas, such as technology, in order to have successful product launches.
New products are hardly the only area contributing to margin compression...
Management fees continue to be under pressure, particularly for the smallest managers Management fees also continue to be squeezed. basis points lower than the historical 2% as respondents reported an average rate of 1.45% for their flagship vehicle. The smallest managers who often lack the negotiating leverage of the larger managers and must make fee concessions for initial capital reported a lower average rate of 1.33%.
At the heart of the issue is a more sophisticated investor base and the competition for capital being at an all-time high, which has forced managers to negotiate the terms of investment more than ever. Management fees are the most preferred area to negotiate among managers and investors, and 60% of managers say they have already offered reduced management fees for large mandates.
Over $10bn
Though managers do not prefer to negotiate incentive fees, 70% report that they would
50 $2bn - $10bn Under $2bn
Fig.4 Hedge Funds If you have launch any products in the past two years, what has been the impact in the following areas? Impact of new product launch 100% 85% 80% 84% 78%
60% 40% 40% 20% 17%
0% 2% -20% 24% -40% 41% -60%
Growth in AUM
Investor satisfaction
Impact on brand
Operating margins
Impact on operations/ personnel
5% 4%
Positive Negative
Fig.5 Hedge funds
Based on pre– and post–operating ratios, what is your flagship fund’s average management fee?
Hedge funds and investors Which terms are you most willing to negotiate with
investors? Which of the following terms do managers need to be most willing to negotiate?
Average management fee rate 1.51% 1.48% Liquidity 1.33%
Incentive fee rate
Expenses borne
by funds 23% 34% 33% 48% 23% 16% 29% 50%
Management fee rate
Hedge funds 15% 52% Investors 15% 69%
23% 19%
52%
15%
Least willing to negotiate
Most willing to negotiate
Least willing to negotiate
Most willing to negotiate
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