Liquid alternatives to take share from hedge funds

Added 10th February 2015

The hedge fund industry is under strong competitive pressure to change, yet managers remain generally optimistic, according to a survey from State Street.

Liquid alternatives to take share from hedge funds

Half the respondents in the survey of 235 hedge fund executives expect liquid alternatives to take market share from traditional hedge fund strategies over the next five years. 

“While the scale of the threat to traditional hedge funds remains uncertain, many industry players will launch their own liquid alternative products to capture growing demand in this area,” the report said.


Liquid alternatives share some of the characteristics and upside potential associated with hedge fund strategies, but they are packaged within a mutual fund vehicle, which results in offering a greater liquidity to investors.

Institutional investors are increasingly attracted to liquid alternatives as they look to reduce volatility and increase returns.

The changing model

About 63% of the respondents broadly believed institutional investors will increase their exposure to hedge funds in the next five years.

In order to cater to the growing demand from institutional investors, almost two-thirds (60%) of the executives surveyed said they are looking to broaden the range of investment strategies offered. 

Nearly 37% percent anticipate that hedge funds will expand abroad and one in ten expects to acquire another company.

The survey also highlighted while hedge funds are optimistic about their clients’ appetite for their products, most (91%) believe they will be required to better demonstrate their value to prospective investors.

These pressures are likely to increase hedge fund firms' investments in technology and human resources.

“Not only do hedge funds need to deliver better risk-adjusted performance [but] they are also expected to communicate more effectively about how they achieve their goals. This requires investment in technology and employees with the right skills to deliver new efficiencies, greater agility and higher-quality reporting.”

Pension fund appeal?

Hedge executives remain optimistic about pension fund allocations despite reductions in exposure by influential organisations. 

More than half (55%) of respondents expect pension funds to increase their exposure to hedge fund strategies over the next five years. 

More than half of the managers (53%) believed the primary reason for pension funds to invest more in hedge funds will be to drive portfolio performance. 

“As pension funds aim to reduce deficits, many see hedge funds forming a core part of their strategy to fill the gap. Hedge funds that are able to demonstrate consistent performance and the right mix of products will be able to translate these client needs into growth,” the report highlighted.

However, 28% of those surveyed expect them to decrease allocations to the asset class, primarily due to disappointment with returns. 
State Street said these findings follow the recent decisions by The California Public Employees' Retirement System (CalPERS) and others to reduce allocations to hedge funds or withdraw from them completely.

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