New York (HedgeCo.Net) – Hedge fund managers who survived the financial crisis are now beginning to focus on growing beyond their original business models, according to Ernst & Young’s seventh annual survey of the global hedge fund market, Exploring pathways to growth .
However, the survey shows that while managers want to grow their assets under management through new products and distribution channels, investors do not necessarily plan to increase allocations to hedge funds and are not interested in buying multiple products from one manager.
- A majority of investors (72%) say that they expect to maintain current allocation levels, while managers, particularly smaller managers, remain bullish about both inflows and market appreciation – managers with less than $10 billion under management are budgeting for 15% growth in 2013.
- Two in three managers reported an increase in revenues over the past year as performance improved and assets grew. However, just half of managers reported improvements in margins. One in three managers said margins declined and another 10% noted margins remained unchanged as costs increased.
- One in three European managers noted that costs have increased versus 58% in North America. Although three in four managers in Asia said that costs had increased, they have also been the most successful in raising capital and thereby growing revenue, and margins have improved as a result.
- Over two-thirds of investors say that regulations have had no impact on their due diligence process for vetting investments. Investors and managers are more aligned than in the past in their expectations for the future. Both expect increasing regulatory intrusions and accompanying costs.
- Increased polarization in the industry is more evident than ever, with the largest funds succeeding because of their size and scale and their ability and willingness to invest in the business, and the smallest by virtue of simplicity. In particular, the largest and smallest managers have the most efficient headcount ratios between front-office and back-office personnel – the largest because they have been able to achieve economies of scale and the smallest because they cannot afford to be inefficient.
- Nearly two-thirds of investors either already invest or would like to invest in a customized product. Demand is most evident among funds of funds, with nearly 70% of funds of funds surveyed already invested in a customized solution and another 15% saying they would like to. However, there are some geographical differences, as 75% of managers in North America offer customized solutions or plan to, compared with just 50% of managers in Europe.
More than 75% of hedge fund managers in Europe and North America say that direct investment has increased and most expect this trend to continue.
The survey compares opinions from 100 hedge fund managers who collectively manage nearly $850 billion and 65 institutional investors with over $190 billion allocated to hedge funds. Topics covered in the survey include strategic priorities for hedge funds, changes in revenues and costs, technology, headcount, outsourcing and shadowing, and the future of the hedge fund industry.
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