One of the next growth opportunities for the hedge fund industry may be the retail market, as investors increasingly seek out alternative asset classes. With analysts predicting that retail assets for the industry will climb to $940 billion over the next four years, from only $305 billion at the beginning of 2013, this represents a major opportunity for hedge funds, if they met these lofty expectations.
The Financial Times argues the trend is a convergence of traditional asset managers seeking out products with higher returns and hedge funds looking for additional capital. The demand from asset managers is a result of the struggle to offer alternative products to compete with low fee exchange traded funds (ETFs). While hedge funds certainly don’t offer lower fees than ETFs, they do offer strategies that can be marketed as unique and advantageous for investors. This is especially true in comparison to active equity or bond funds that as a whole haven’t been able to justify their fees in comparison to their ETF peers.
Mutual Fund Firms Snap Up Hedge Fund Managers while Retail Funds Launched
The mutual fund industry has been quick to move into the hedge fund space in order to establish a presence. Franklin Templeton was one mutual fund giant that was active in the hedge fund space, acquiring a majority position in K2. Legg Mason also was involved, adding Fauchier Partners to its group.
While these managers have been busy making acquisitions, hedge fund managers have been launching retail-oriented funds on a more frequent basis. Highbridge and AQR have recently released their own retail funds, while KKR has launched a fund to be distributed to retail clients by Charles Schwab. All of this stacks up to increasing pressure on the traditional mutual fund industry.
Shift in Fee Model May be Behind the Movement
One of the leading factors in the increased interest in retail hedge funds may come from how asset managers are compensated by their clients. Sandy Kaul, head of business advisory services for Citi Prime Finance, told the Financial Times, “In the US wealth adviser market there has been a shift in the pay structure, away from fee-based commissions over the past 10 years, and an increase in fees on assets under management.” As a result, wealth managers are looking to hedge funds to preserve asset value, and therefore, their fee revenue.
What are the Implications for Hedge Fund Job Seekers?
The potential for large scale retail acceptance of hedge funds is an important development for those currently in the industry or potentially seeking future opportunities. Many analysts have wondered where exactly future growth for the industry would come from, and in the past, retail investors would have seemed like a long shot. But recent regulatory changes and growing enthusiasm from money managers seems to be changing that belief. Retail hedge funds are increasingly viewed as a core component of future wealth management offerings. As a result, the increased growth potential of the industry should come as welcome news for those in the industry or considering a future in hedge funds.