(February 18, 2014) — As alternative investments continue to boom, investors’ expectations and strategies have evolved beyond just diversification of risk, according to the Deloitte Center for Financial Services.
As a result of these changing demands, and regulatory environment, have put pressure on hedge fund and private equity managers to adapt accordingly.
“The challenges for alternative investment managers have never been greater, but the appetite for investors has never been greater either, so fund managers are feeding off that investor buzz,” said Cary Stier, head of Deloitte’s global investment management unit.
Hedge fund assets hit a record high of $2.6 trillion in 2013, and private equity firms also reached their highest fundraising level since 2008, Deloitte found. Alternative returns were “uneven” though, with hedge funds gaining 11% in the fiscal year ending December 31, 2013, significantly lower than the S&P 500’s 30% return and 17% increase of an average 60/40 portfolio.
Despite bumpy performance, institutional investors are continually increasing their allocations to alternative investments and are “naturally drawn to larger, well-established funds with impressive operational and compliance infrastructures,” the report said.
The approach in 2014, however, will be different, Deloitte found.
“Institutional investors, in particular, are no longer looking at alternatives as a separate asset class, but instead are deconstructing them into risk and attribution themes—strategy, geography, and liquidity, for example—as the basis for making allocations to hedge funds and private equity funds,” the report said.
Such new vision has pushed fund managers to focus on data collection, analysis, and reporting. Manager selection could easily be decided on what kind of customized reporting and greater transparency a firm could offer, the report found.
“Data is the hottest topic so far,” said Ellen Schubert, a senior advisor in Deloitte’s hedge fund practice. “Every meeting I go into right now is about data—the amount of data that hedge funds have to retain, manage, manipulate, and massage for their portfolio managers, their investors, their regulators, and the entire company.”
Deloitte said managers in the lead have already been proactive over the past few years, putting together a comprehensive data strategy that involves “reverse-engineering investment offerings based on their clients’ unique obligations to their own investors.”
This year will have alternative managers increasingly focused on understanding risk, the report said. By implementing strategies such as “risk-based resourcing models,” managers will be encouraged to a more holistic view of risk when allocating resources to survive a competitive market.
Smaller and less established managers will also have to discover “niche markets and help institutional investors round out their portfolio exposure,” according to Deloitte.
Related content: Infographic: 2013 Periodic Table of Hedge Fund Returns, Danish Regulator Warns on Alts Investment, Macro Hedge Funds Suffer Despite Industry Boom