A world away from their historic market of institutional and high-net-worth investors, a new growth opportunity is opening up for US alternative investment managers. Retail investors are beginning to place their savings in alternative mutual funds and, if the trend continues, they’re likely to fuel an increasingly large proportion of hedge and private equity managers’ profit growth.
Illustrating the scale of the opportunity, the number of US alternative mutual funds has grown at a year-on-year rate of 14% since the end of 2008, while assets under management have expanded at an even faster pace of 27%, according to data from Strategic Insight Simfund MF. Alternative mutual fund assets totalled US$199 billion at the end of June 2013, with alternative mutual funds accounting for approximately 9% of net long-term mutual fund flows during the first six months of the year.¹
This growth in retail demand for alternative funds spells opportunity for both specialist alternatives managers and generalist mutual fund managers. But alternative funds have more complex investment strategies than traditional mutual funds, which in turn lead to greater product introduction risks. As a result, launching alternative mutual funds takes a significant amount of planning. Indeed, the entire cycle from product planning to launch might take up to two years – and this is one of the few occasions when every function within the firm has an important part to play.
In our view, asset managers need to prepare carefully before launching alternative investment funds, if they are to capitalize effectively on their opportunity and minimize reputational risk. When doing so, we believe they should look into the following ten critical touch points:
Adapting an organisation to take advantage of the retail alternatives opportunity is an exercise that is best led by the CEO. Conducting an exercise that brings together activities as diverse as valuation, client suitability and education is so complex that the CEO, with a view over the entire firm, is in the best position to coordinate all the different elements.
But given the growth trend of alternative mutual fund assets – and the promise of greater profitability than traditional mutual funds – addressing the touch points we have highlighted will help you to prepare a path to success.
¹Figures are based on specific strategies classified as ‘alternative’ within the Strategic Insight Simfund MF database. Some industry observers use a wider definition, including strategies such as flexible global asset allocation and unconstrained global bond. If this broader definition is used, the magnitude to the ‘alternatives’ opportunity becomes much greater.