The Evolving Competitive Landscape for Hedge Funds- Study

New York ( – A new independent study that examines the continued emergence of investment managers in the equity long and short marketplace and their convergence with hedge funds has been published by Pershing LLC, a BNY Mellon company, and Finadium LLC.

The report entitled, Competition and Convergence: The Evolving Landscape for Hedge Funds, indicates that while investment managers have relatively few assets in equity long and short investment portfolios, this segment of the market continues to grow rapidly as firms seek to diversify their business lines and compete with hedge funds. This new competition for assets has pushed some hedge funds into long-only investment strategies and others towards retail distribution. The report suggests that investment managers will become more important to hedge funds as potential partners in product offerings and mergers and acquisitions. Key findings from the study include:

—  Growth of Equity Long and Short Investment Strategies Among Investment Managers Expected to Increase – Investment managers’ control of equity long and short investment portfolios is expected to rise from $204 billion to $345 billion by 2012 representing an increase from 19% to 28% of today’s $694 billion marketplace.  According to a recent Finadium survey, 65% of investment managers now operate some sort of long and short fund, up from 33% one year ago.  Independent hedge funds are  also expected to continue to grow and increase their equity long and short portfolios to $810 billion by 2012 as equity markets recover;

—  Potential Regulatory Reform Remains a Wild Card – Investment managers view potential regulatory reform as a wild card in driving convergence between themselves and hedge funds.  The report indicates that some investment managers advocate working more closely with hedge funds as sub-advisors and potential acquisition targets with the expectation that increased regulation will occur.  Without specific regulation, hedge funds will continue to have few legal obligations to disclose fees and practices;

—  Hedge Funds Continue to Benefit from Strong Prime Brokerage Relationships – Investment managers have notably different servicing needs than their hedge fund competitors.  These organizational requirements have created challenges for investment managers looking to do business with noncustodian prime brokers, to the benefit of hedge funds with strong prime brokerage relationships. While investment managers are becoming more agile in their technology and operations, no party has surmounted the funding obstacles that regulatory and market pressures have put in place; and

—  Tri-Party Custodial Relationships May Offer Hedge Funds an Edge – Hedge funds have a wide range of opportunities and challenges to take into consideration when evaluating the strategies of investment managers in the long and short arena.  For example, hedge funds should consider tri-party custodial relationships which bring many traits of the asset management industry into their domain. These arrangements allow hedge funds to mitigate their counterparty risk by custodying cash and fully paid for securities with a less leveraged bank custodian, while prime brokerages still hold the fund’s short positions and provide margin financing.

“As investment managers increasingly expand into the equity long and short marketplace, hedge fund managers need to provide their investors with a distinct value proposition that uniquely positions them in the marketplace.” Craig Messinger, managing director of Pershing Prime Services, said, “Exploring new investment strategies, embracing potential merger and acquisition opportunities and offering clients innovative separately managed account solutions are several tactics hedge funds should consider to help continue growing their businesses.”

Alex Akesson
Editor for
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