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The report 'In Sync: How hedge funds achieve alignment with investors to foster long-term strategic partnerships' outlines the ways fund managers are adapting their business model in response to competition and the evolving mandates of investors.

The report builds on AIMA's 2019 report 'In Harmony' which examined the same manager-investor dynamic, including a time-series analysis of how trends have changed.

The purest form of alignment between fund managers and investors remains skin in the game that principals have in their funds. This report demonstrates that this approach is now expanding to include highly skilled investment executives to ensure they remain focused on delivering for their investors as well as dissuading them from exiting the fund amid the increasing war for talent across the industry.

Investors are increasingly making a high level of transparency around fees and expenses a prerequisite to any allocation. In both the manager and investor surveys that inform this report, 70% of these respondent pools cited greater transparency as the best way to improve alignment.

Fund managers and investors continue to explore more equitable compensation arrangements which meet their expectations. In addition to hurdle rates becoming more popular, the modern fee model is underpinned by a variety of relationship pricing, lock-ups, and other value service offerings.

The research revealed that larger fund managers (those with more than US$1 billion in assets under management) are consistently more likely to employ some or all these features to offer greater flexibility to investors, thereby offering a roadmap to smaller funds looking to scale and understand the needs of institutional investors.

Among these options, the use of tiered fees has become more popular. Most fund managers (70%) offer preferential fees compared to only a third that said they did so last time. For managers, a larger management fee can help to meet the operating costs of a business. For investors, tiered pricing allows them to share in the economies of scale as a fund's assets grow.

Finally, responsible investment has entered a new phase. The macroeconomic headwinds of the moment demand a more nuanced ESG strategy that transcends binary exclusion lists and is only applied where relevant.

When asked about the challenges to making ESG-oriented investments, just over half (52%) of fund managers said it wasn't relevant to their mandate, with a further third (34%) saying they lacked sufficient data.

The report is informed by two global market surveys. One of 138 alternative investment managers with an estimated aggregate of US$707 billion in assets under management. The other includes the views of 35 institutional investors that allocate to alternative investment funds.

Tom Kehoe, Global Head of Research and Communications at AIMA, said: "This report represents our latest exploration into the manager-investor dynamic that underpins hedge funds. We find that the evolving relationship has brought about significant changes that impact the overall industry since we last reviewed this relationship in 2019. Through more flexible fee models, new products, value advisory services, as well as greater transparency and knowledge sharing, our analysis reveals a more strategic partnership that results in a deeper alignment of interests between both parties."

Jonathan Waterman, National Asset Management Leader at RSM US LLP, said: "We couldn't be more excited to present 'In Sync,' which is our third publication collaborating with AIMA on trends in the asset management industry. While some metrics are similar to our prior publication results in 2016 and 2019, certain trends have formed that show how much the industry has evolved over the past nine years, especially coming out of the pandemic."

Tessie Shih, Director of Investor Relations at CFM and Chair of AIMA's Research Committee, added: "This report offers a timely update on how fund managers are adapting their offering to best align their interests with those of their investors in today's fluid market environment. For fund managers, the alternative investment space is more competitive than ever when it comes to securing allocations from investors and it is important to employ a wide range of tools to stay ahead.

"This report covers everything from fee models to transparency and knowledge-sharing best practices, through to ESG and bespoke products. At its core, both the data and the case studies presented in the report reinforce the point that a successful manager-investor relationship must be viewed as a close partnership where both parties are progressing in the same direction for mutual gain."