By Michael McCabe, Head of Business Development, Marketing, and Product
So far in 2019 we’ve seen a rebalancing of hedge fund assets as investors have redeemed from long-short equity funds, global macro funds and commodity trading advisors (CTAs) in favor of credit strategies and multi-strategy hedge funds. According to eVestment, investors have moved $3.9 billion into multi-strategy hedge funds, the highest net inflows of any strategy measured.
It’s a trend that’s likely to endure as investors aren’t just chasing last year’s performance – they’re looking for strategies with lower correlation to equity markets to hedge against a potential and long overdue correction.
Many asset managers looking to retain and gain assets in a discerning market have responded by building new multi-strategy products or bolting them onto existing capabilities. They are also launching private equity style and hybrid funds that lock up investor’s capital, which can be deployed opportunistically. As risk markets create more volatile conditions, this enables managers to cater to investor demand as well as diversify their investment strategies so they become more resilient.
However, adding capabilities and branching out into new multi-asset strategies is not a simple process, and can create new operational as well as investment management challenges. Multi-asset strategies require more complex risk, exposure and performance reporting. Also, many of these products simultaneously employ systematic and discretionary portfolio management and/or invest across the liquidity spectrum, which creates even more layers that can be challenging to clearly communicate to investors.
In addition, these portfolios can present major challenges to the middle and back offices of investment managers that have not been previously exposed to the new investment style.
In hybrid vehicles, the introduction of a capital call style structure may be very unfamiliar to operations and investor servicing staff that have been trained on open ended structures, and similarly the open-ended features may be unfamiliar to those trained on closed end vehicles. New systems and training will need to be implemented to enable staff to support different reporting requirements for portfolio managers and investors.
More generally, institutional investors are allocating capital to managers that can respond to their needs, but they also expect frequent and transparent risk, attribution and performance reporting. This can burden an organization that doesn’t have adequate people and technology in place to meet such requests.
Firms with new or growing multi-strategy funds or hybrid alts vehicles will need to significantly bolster their operations. However, hiring talent to provide operational support can be difficult in a tight job market, particularly as financial firms find themselves in competition with technology companies. According to EY’s 2018 Survey of Alternative Investment Managers, 61% of hedge funds “have no formal program for recruiting technology professionals” in the first place.
Investment managers with new and growing multi-strategy funds or hybrid funds also face challenges for their investor relations teams, as reporting requests from clients multiply.
Firms can meet these challenges, but it will come at a cost – either by investing significantly in staff and infrastructure upgrades, or by bringing in an outsourced provider or strategic partner to take over key functions. For managers chasing the growth, it’s prudent to expect growing pains in order to achieve long-term success.