BOSTON (HedgeWorld.com)–Growing focus on alternative investment products is a major driver of change in the traditional fund industry, according to a study of 185 investment managers in 20 countries conducted by accounting and tax services firm KPMG International and think tank Create.
Money managers now are listening more to demands from consumers, said John Capone, a partner at KPMG’s investment management and funds practice. “One change is providing alternatives to standard equity, as clearly shown in hedge funds and income products,” he remarked.
Polled asset management executives in Asia, Europe and the United States see a need in their industry for change that goes beyond cost cutting and product diversification. From this point of view, while the move into hedge funds and other alternatives such as guaranteed products has been significant, bringing about innovation and new attitudes within their own organizations remains a challenge.
Much of the change is a response to customer disappointment with performance and demand for more effective risk management and higher or absolute returns. Nearly 60% of the managers said their company became interested in hedge funds for institutional investors during the stock market slump, and around 50% said they considered hedge funds for retail investors.
But the majority regards the popularity of hedge funds and bonds as a cyclical phenomenon, while the growing importance of guaranteed products and passive funds is considered a more durable shift.
Not all survey respondents were enthusiastic about hedge funds. “Alternatives are the new mantra. They’re overblown,” said one (anonymous) asset manager. “Hedge funds are hugely risky. They’ll come a cropper, for sure, as will bonds,” opined another.
Still, nearly 60% consider alternatives a key driver of change in their company’s business over the next three years. “Absolute returns are the name of the game, at least over the next three years,” said one study participant.
Hedge funds also are playing another role, as a model for new compensation plans at mutual fund firms, the survey suggests. Large asset management companies are evolving performance-based compensation schemes for portfolio managers. “It is becoming more like what you see in the alternative space,” points out Mr. Capone. “Delivering a return in excess of a benchmark and getting paid for that is becoming the goal.”
According to the KPMG/Create report, problems in traditional asset management include a lack of focus with too many products that do not meet customer needs, too much emphasis on the amount of funds under management and inefficiencies and diseconomies created by large scale. Executives complain of lack of clear direction, conflicts around pay and bonuses, “blame others” attitudes and insufficient attention to service.