A new report from Cerulli Associates finds that the hunt for a better return is leading growing numbers of European retail investors toward alternative funds.
This phenomenon will create opportunities for asset managers willing to be flexible on fee structures, the firm details in the latest issue of The Cerulli Edge – European Monthly Product Trends Edition.
Cerulli Associates says providers are making hitherto closed-off vehicles more accessible, boosting liquid alternatives including retail-friendly hedge funds, which are now available on direct-to-consumer platforms. The firm says that such funds number 500, with assets under management having more than doubled since the end of 2011 to EUR255 billion (USD289 billion) at the close of June this year. “The financial crisis of 2008 also helped to align investors' needs with those of investment managers. Hit by heavy outflows, hedge funds sought a wider investor base.”
Overvalued equity markets and negative bond yields mean that more investors are prepared to consider more complex solutions, including vehicles regarded as high risk, the firm found.
However, Cerulli suggests that to fully capitalise on this trend, managers should rethink pricing strategies, dropping performance fees, for example, and produce fact sheets that are clear and easily understood.
"With active funds having a hard time justifying their fees when passives perform just as well, alternative funds may find it even harder," says Barbara Wall, Europe research director at Cerulli. "Asset managers might also consider dropping the performance fee, especially if it's just for outperforming cash."
Cerulli notes that while Aberdeen Asset Management's new Liquid Alternatives Fund, launched in August, has an expensive-looking total expense ratio of 1.7 per cent, there is no performance fee. The fund claims to have massively outperformed in August, losing just 0.15 per cent, compared with a loss of 6.8 per cent for equities worldwide.
"This is the sort of uncorrelated performance investors might be prepared to pay for, though it would have to be sustained over a longer period," says Wall. "Asset managers need to produce genuinely uncorrelated returns, but this may entail investing in staff with the required skill sets and playing a long game of gaining investor confidence and trust in products that will never be as straightforward and transparent as traditional vehicles."
She cites Standard Life's Global Absolute Return Strategies – the biggest product in the liquid alternatives space – as an example of what is possible, both in terms of flows and performance.
Further improvement in transparency is needed, says Cerulli. The main attraction of alternative funds is that they offer returns not correlated to the mainstream asset classes. This tends to lead to investing in areas not widely understood. The heavy use of derivatives, for example, can leave some investors confused as to how the fund's strategy is executed.
Brian Gorman, an analyst at Cerulli, notes: "Fact sheets often fail to provide the details of such matters, with managers arguing the information would serve no purpose. Similarly, absolute return funds vary in their disclosure about their short positions. Some only reveal general details, reluctant to identify individual companies."