|
There is a watchful eye over spending, too: CFOs and head traders are analyzing how much money they generate for their prime brokers, execution counterparties and other vendors, playing each provider off of one another to lower cost and extract more value. In this sense, hedge funds are no longer the outsiders of the asset management industry. Rather, they are driving trends and spending a significant amount of money with the Street to outperform peers.
However, the market turbulence of 2007 and 2008 has negatively impacted one out of every two participants through direct exposure to securitized debt, ineffective models and sub-optimal asset allocation. Many of these funds are taking some chips off the table and adopting a “wait and see” mentality toward the markets. But market volatility creates as many opportunities as threats and a select number of funds have been able to protect, or even bolster, returns and are working current market conditions to their advantage.
Generally, hedge funds are in expansion mode. While many US hedge funds still run their international portfolios from the green pastures of Greenwich, CT, many fund managers have plans to open offices around the globe. In addition, the increase in capital will spawn additional fund launches. Despite the rapid growth of the hedge fund industry in recent years, the real change is ahead.
Prime brokerage is at the center of this paradigm shift. The primes – and related businesses – are changing with the times to accommodate hedge fund clientele. TABB Group believes that as the hedge fund industry continues to grow, and other asset management businesses attempt to compete more directly with hedge funds, the importance of prime brokerage will only continue to rise. Meanwhile, hedge funds are looking beyond the primes for certain services – such as stock lending – and are allocating business according to whichever combination works best.
Some would argue that now is the best time for the hedge fund industry as a whole to prove itself. The last year or so has shown how the basic rules of asset management largely still apply. When markets are bumpy, investors get nervous. Underperforming funds experience redemptions and strong returns attract inflows. This cycle will continue as long as managers find ways to keep their business growing through differentiation and new fund strategies.
TABB Group study on Hedge Funds 2008:
Perspectives on Prime Brokerage, Volatility and Expansion
This study summarizes conversations with portfolio managers, traders, marketing/sales, and C-level employees at 61 hedge fund companies. TABB Group asked them to share their views during Q1’08 on a variety of topics including the volatile market conditions, prime brokerage, and business expansion. These findings are segmented by assets under management and investment style to examine the variations and similarities among different demographics. |