Hedge fund firms, while no strangers to the community of Investment Advisers and Wealth Managers, may not be attracting their fair share of $150 billion in net flows to alternatives anticipated from independent advisers. According to a white paper, based upon a survey by InvestmentNews for The Blackstone Group L.P., hedge fund firms trail private equity firms.
Investment advisers indicate that 83 percent of their clients are interested in alternative investments. However, investment advisers surveyed acknowledge that allocations to alternatives are currently at a mere 10 percent, a figure they anticipate will rise to an equally paltry 14 percent over the next three years.
Why Isn’t This Percentage Larger?
Of the 392 advisers participating in the study, most of whom are independent, 67 percent cited their clients’ lack of understanding as being the primary impediment to greater investment in alternatives and 51 percent expressed the need for better insight into portfolio construction with alternatives.
Given the fact that each one-percentage point increase in investment represents the potential to increase assets under management (AUM) by $12.5 billion annually, it might behoove the hedge fund industry to commit some of its marketing resources to provide investment advisers’ clients with the understanding they so desperately seek, including insights into integrating hedge fund investments into their portfolios.
Is an Outreach in Order?
Of course, this study and the resultant white paper were prepared for the benefit of investment advisers—not the hedge fund industry. However, the study can be extremely useful to hedge funds interested in growing AUM.
Investment advisers with AUMs of $250 million and greater already have about 40 percent invested in the broader alternative market, but less than 35 percent of those assets are invested in hedge funds.
Investment advisers with smaller AUMs have much less invested in hedge funds. For example, firms with less than $50 million have around 15 percent invested in hedge funds and firms in the $50 to$ 250 range have only around 21 percent invested in hedge funds.
Low Hanging Fruit
Investment firms with robust AUMs typically enjoy the resources to educate its investors. These firms have the resources to educate their investors. Such firms can inform their investors and overcome their lack of understanding. Large sized firms can illustrate the importance of alternatives as a component of portfolio construction. Firms with smaller AUMs are at a disadvantage and this disadvantage creates an opportunity for aggressive and well-informed hedge fund firms. Small to medium sized firms are the low hanging fruit. Hedge funds must reach out and collaborate to meet client needs in these small to medium sized adviser firms.
It’s a Win-Win!
The InvestmentNews study has established that 4 of 5 clients are interested in alternative investments. An aggressive campaign with small to medium sized firms has positive ramifications for investment firms and opportunities to grow AUM for hedge funds. Billions are at stake and a properly crafted marketing campaign can spell success for hedge funds and the advisers with whom they collaborate.
Unless hedge funds take action, they will continue to take a back seat to private equity and other alternative investments.