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The report is based on global research with more than 100 hedge fund managers representing approximately $440 billion of assets under management. Their views reflect fundamental shifts occurring in the hedge fund industry; key findings include:

· A majority of hedge fund managers expect a significant shift in their primary sources of capital to pension funds over the next five years;
· Almost 70% of managers said they offer, or plan to offer, custom investment solutions;
· More than two-thirds of managers anticipate using specialised fee structures to attract investment;
· More than four in 10 managers expect to change the mix of countries where they invest, with more than a third targeting emerging and frontier markets; and
· Regulation is seen as the biggest threat to the growth of the hedge fund industry, as cited by more than three-quarters of managers.

Jack Inglis, AIMA CEO, said: “The global hedge fund industry, which has grown by over 10% a year since the financial crisis, is well positioned to maintain this growth trajectory over the next five years. The research shows that as the industry continues to evolve and mature, a combination of institutionalisation and customisation will effect positive change and encourage ever greater allocations from pensions and other institutional investors.”

“Our survey shows the transformative change that is impacting every aspect of hedge fund management, from product mixes and fee structures through to markets and investor types,” said Robert Mirsky, Global Head of Hedge Funds, KPMG International. “The managers we spoke to around the world recognise that the industry must continue to adapt and adjust strategies in order to thrive.”

Shift to institutional investors
The report finds further evidence that the growth of the hedge fund industry is being driven today largely by institutional investors rather than individuals. A majority of managers expect a significant shift in their primary sources of capital, with most saying that pension funds – both corporate and public – would be their primary sources of capital by 2020.

Forty-six percent of managers said that over the next five years they would either alter their fund strategy or launch new products to attract capital from pension funds.

“The days of hedge funds simply being an investment tool for high-net worth individuals are over,” said MFA President and CEO Richard H. Baker. “Institutional investors like pension plans, university endowments, and charitable organisations now make up nearly 65% of the industry’s assets. These diverse partnerships help local economies and underscore the important role alternatives play at both the macro and micro levels.”

New strategies highlight customisation, new markets
Nearly two-thirds of managers said there is increased demand for custom solutions from their investors. In fact, almost half said they already offer a ‘fund of one’ or managed fund solution with an additional 21% saying they intend to offer these solutions within the next five years.

With custom solutions come more customised fee structures. More than two-thirds of managers said they anticipate using specialised fee structures as a means of attracting investment.

Geographically, most capital invested in hedge funds still comes from North America and Europe, but the research suggests that the greatest percentage increases in inflows are coming from Asia-Pacific, the Middle East and Africa. More than four in 10 managers expect to change the markets where they invest – with more than a third of those targeting emerging and frontier markets.

Limiting factors to industry expansion
Increased cost and complexity associated with running a hedge fund management firm will limit growth of the industry over the next five years according to the research, with more than three-quarters saying the number of hedge fund managers will decrease or stay the same.

Regulation, cited by more than three-quarters of managers, is seen as the biggest threat to the growth of the hedge fund industry. This is particularly the case in Europe and Asia Pacific, where more than 80% of managers cite regulation as the biggest threat to growth, while in North America it was cited by 67% of managers.

“The research confirms what KPMG professionals see with clients, with a much greater focus on compliance,” said Tom Brown, Global Head of Investment Management, KPMG International. “But the good news is that while compliance obligations have increased operating costs, there are signs that these costs are flattening out, and fund managers can put more of their attention on growth.”

Press release

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