Conclusion

Traditional business diversification – via multiple investment strategies and asset classes – is largely a thing of the past, but the fundamental drivers behind it – strength through multiple revenue streams and investor segments – are as important today as they have ever been. Few hedge fund firms now can hope to build a business…
September 2017

Report Overview

Traditional business diversification – via multiple investment strategies and asset classes – is largely a thing of the past, but the fundamental drivers behind it – strength through multiple revenue streams and investor segments – are as important today as they have ever been. Few hedge fund firms now can hope to build a business on more than one core competency. All hedge fund firms, at some point in their life cycle, will look to offer that core competency to as wide a range of investors, and via as wide a range of solutions, as possible.

Diversifying beyond the traditional Cayman structure into vehicles designed for different investor segments has been the first step for most – onshore liquid alternative funds the obvious example. But many firms have come unstuck. The nature of the solution should be driven by the nature of the problem. If the goal is to diversify the investor base, then pursue the onshore launch. But if the plan to diversify has been driven by capacity constraints in the offshore product, it may be worth exploring ways to expand capacity in the offshore range rather than risk diluting brand and investor base through an unnecessary onshore launch.

And brand is an increasingly important consideration generally. In a crowded marketplace, one dominated by highly visible asset managers and hedge fund industry stalwarts, firms need to define themselves somewhat narrowly. For firms who made hay during the golden years of the late 1990s and early 2000s, simply being a ‘hedge fund manager’ allowed for, if not demanded, a less inhibited approach to diversification. Newer hedge fund managers do not have the same freedoms with their investors or their labels and therefore tend to see hard limits on product diversification as a given.

It is a sign of the times that everything a manager does needs to be better earlier, including communication of the value proportion. A firm that looks like a billion-dollar club manager in its marketing materials will best convince investors they are headed that way. Ultimately, though, brand is moot until a firm is on its feet. Look the part early on, but get to operational efficiency first before truly deciding on an identity. This offers the best chance of achieving the robust flexibility needed to survive in an increasingly demanding industry – and the best chance that a firm’s particular flavour of diversification will resonate with investors.

Exhibits and Citations

Section 1 – Industry diversification

Exhibit 1.1: Number of core hedge fund strategies offered by ‘billion dollar club’ managers with hedge heritage, 2017, HFM Insights, HFM Data (Page 8)

Exhibit 1.2: Number of investment strategies vs. investment teams at managers with hedge heritage, 2017, HFM Insights (Page 9)

Citation: Global Alternatives Survey, Towers Watson, 2017 (Page 16)

Exhibit 1.3: Asset class diversification at ‘billion dollar club’ managers with hedge heritage by manager location, 2017, HFM Insights, HFM Data (Page 10)

Exhibit 1.4: Asset class diversification at ‘billion dollar club’ managers with hedge heritage by manager size, 2017, HFM Insights, HFM Data (Page 11)

Exhibit 1.5: Product vehicle diversification at ‘billion dollar club’ managers with hedge heritage by manager location, 2017, HFM Insights, HFM Data (Page 12)

Exhibit 1.6: Product vehicle diversification at ‘billion dollar club’ managers with hedge heritage by manager size, 2017, HFM Insights, HFM Data (Page 13)

Section 2 – Product diversification

Exhibit 2.1: Hedge fund managers’ biggest concerns when launching a new product type, 2017, HFM Insights (Page 15)

Citation: Alive & Kicking, AIMA/GPP Emerging Manager Survey 2017 (Page 16)

Citation: Starting a fund, Gemini Fund Services, 2016 (Page 16)

Exhibit 2.2: Hedge fund manager’s current vehicle types, 2017, HFM Insights (Page 16)

Exhibit 2.3: Low end of key costs for hedge fund product launches, 2017, HFM Insights, Various, Laven Partners, Gemini Fund Services (Page 17)

Exhibit 2.4: Attributes of Ucits hedge funds with $100m or more in AuM, 2017, HFM Insights, HFM Data, Kepler (Page 18)

Exhibit 2.5: Typical Ucits hedge funds by manager type and fund size, 2017, HFM Insights, HFM Data, Kepler (Page 20)

Section 3 – Impact on brand

Exhibit 3.1: Hedge fund firms ready for branding, 2017, HFM Insights (Page 22)

Exhibit 3.2: Hedge fund firms to shutter if founder left, 2017, HFM Insights (Page 22)

Exhibit 3.3: Remaining founders at ‘billion dollar club’ managers with hedge heritage, 2017, HFM Insights, HFM Data (Page 23)

Exhibit 3.4: ‘Billion dollar club’ firms with hedge heritage with one remaining founder, 2017, HFM Insights, HFM Data (Page 24)

Exhibit 3.5: Formation years of ‘billion dollar club’ managers with hedge heritage, 2017, HFM Insights, HFM Data (Page 25)

Exhibit 3.6: Ten largest hedge heritage ‘billion dollar club’ managers with remaining founders aged 60 or older, 2017, HFM Insights, HFM Data (Page 26)

 

About HFM Insights

HFM Insights is the new research and analysis service from Pageant Media, sitting within the company’s hedge fund intelligence network, HFM. The division produces research reports and analytical articles on a variety of topics in the global hedge fund industry, including business operations, investor relations, technology and regulation. Leveraging Pageant’s wealth of data and news sources, and with access to the HFM network’s vast membership, HFM Insights is uniquely positioned, offering exclusive surveys and expert commentary.

Report Author

Tony Griffiths,
Head of Research

+44 (0) 20 7832 6649

t.griffiths@pageantmedia.com

www.hfm.global