A few thoughts on forces reshaping the hedge fund industry, by Michael Patanella, National Asset Management Sector Leader
The hedge fund industry is under pressure. Long-standing fee structures are being recast as fund managers design new agreements that emphasize performance over management fees. The bull market that has powered exchange-traded funds has been less favorable for hedge funds, as they struggle to achieve alpha scores above performance thresholds. Large institutional investors are pushing for greater transparency in both performance and costs, and some are re-evaluating their hedge fund investments.
Despite these challenges, the industry can point to several positives. The industry’s total assets under management continue to trend upward. Proposed federal tax cuts, while still in the early stages of discussion, could benefit both the funds’ high-income investors and hedge fund managers. (In contrast, the future of carried interest that reduces their tax burden is still unclear.) Less accommodative monetary policy and higher interest rates could also help some funds. Taken together, the political and economic environment may portend greater volatility that would allow hedge fund managers to identify mispricing opportunities.
The Trump administration has also promised a general relaxation of the economy’s regulatory burden, including less strenuous rules for the financial industry. But while the regulatory regime in the United States may ease, there is little indication of a similar move overseas. As the hedge fund industry consolidates and operations globalize, compliance in overseas jurisdictions assumes greater importance for the industry’s operations.
Hedge funds will continue to use technology to reduce the costs of regulatory compliance and improve reporting. Funds will also increasingly rely on analytics and artificial intelligence for strategic decisions. The specialized nature of hedge fund investing and its requirement of accredited investors may shield funds from some of the new competition in the broader asset management industry. Nevertheless, robo-advisers represent a disruptive force as hedge funds seek to compete for “nearly wealthy” individuals.
Overall, the hedge fund industry will need to demonstrate the continued validity of its value proposition in a changing political, economic and technology landscape. In Grant Thornton LLP’s report, The future of growth and the asset management industry
, as hedge funds rewrite the solution for success, we offer strategies hedge fund leaders can take to shape their businesses to respond to these changes and uncertainties.