While our survey finds that managers are seeing an increased demand for customized products—such as funds of one and managed accounts—there are indications that “liquid alternatives” such as UCITS and 40-Act funds, which are essentially mutual funds, are continuing to gain traction.
UCITS pertain to collective investment in transferrable securities, essentially a mutual fund in the European Union.
Throughout this survey, respondents have indicated that they are moving toward greater customization of fund structures and fee arrangements; our data suggest they are also customizing their product offerings.
The trend toward customized product offerings is clear. Almost half (47 percent) of all fund managers report that they already offer a fund of one or other managed account solution. Twenty-one percent say they plan to offer these solutions within the next five years.
“When I talk to my marketing folks, they see fund of one and customized products as the big growth area,” said one large US-based investment advisor. “We’re still pushing our comingled products, but it’s become a much harder sell recently.”
Not surprisingly, large-sized fund managers were more than twice as likely as their smaller counterparts to say they already offered funds of one. But smaller fund managers seem keen to catch up: 50 percent of respondents from smaller funds said they plan to offer a fund of one solution in the next five years (half of those say they will offer the product within the next 12 months).
As we reported in our previous Global Hedge Fund Survey, liquid alternative funds, such as UCITS and 40-Act funds, are continuing to gain traction. As one manager of an offshore fund candidly noted, “Investors are definitely looking for more liquid products with shorter redemption notice periods—investors want to have their cake and eat it, too.”
Indeed, 38 percent of respondents said that they either had, or were developing, a UCITS fund (making it the second most popular product offering according to our survey). More than a quarter (27 percent) said the same about 40-Act funds (the fourth
ranked product).
It’s become a matter of ‘why not’ as opposed to ‘why’”, noted one London-based fund manager who is currently launching their first UCITS fund. “Launching a UCITS fund aligns nicely with our strategy of liquid macro fixed income, but I also believe that the UCITS platform will be more attractive to European pension funds and investors that don’t want to put their money into a Cayman fund.”
Fund managers headquartered in Europe were, as would be expected, most likely to say they either had, or were developing, a UCITS fund while north American managers were most likely to point to an existing or planned 40- Act fund. Interestingly, however, fund managers headquartered in Europe demonstrated a high preference for both UCITS and 40-Act funds.
Many managers also suggest that they are waiting to see how existing products in the market perform. “Banks and larger asset managers will eventually be all over liquid alternatives, but not until they’ve had time to prove their performance,” a Canadian-based investment manager added.
Some, however, suggest that the shift toward attracting institutional investors may dampen the appeal of launching new liquid alternative products for larger managers. “We want allocations from pension funds with longer-term strategies so we have no interest in providing daily liquidity products,” a UK-based manager said.
Others worry about the longer-term impact of moving toward more liquid alternative strategies. “With UCITS funds and alternative investment funds [AIFs] there are differing approaches to the business that are being adopted in light of new and altering compliance requirements,” noted one UK-based manager. “The downside to this is that some
marketplaces are being missed.”
Likely as a measure to retain control during a time of transition, the majority of managers (58 percent) said they would expect to use more direct methods when launching new products and funds into the market. Around a quarter (22 percent) said they would likely launch new funds on top of their existing funds business.
However, one in five respondents from smaller-sized fund managers said they would likely use platforms to launch new products, presumably in order to reduce operating costs and complexity. “Smaller managers are joining our platform because we take away the headache of operating infrastructure which means our managers can just focus on trading — it’s what they like and what they’re good at,” added one large European hedge fund manager and platform provider.
The article is taken from KPMG’s publication, entitled “Growing Up: A New Environment for Hedge Funds.”
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