Growth Opportunities for Hedge Fund Managers

Inside many hedge fund firms today there is a discussion going on about the future of asset raising and the potential to launch a product in the alternative mutual fund space. For many firms, this is a bit of a foreign topic as most hedge funds have historically been marketed to institutional type buyers. One of the key motivators for hedge funds, however, is rapid growth of alternative mutual funds. In 2013, asset levels in the category grew at 43% versus 15% for the hedge fund industry. Underlying those growth rates is the fact that hedge funds with less than $1 billion in assets had very little growth, according to a recent report from Barclays titled “Going Mainstream Developments and Opportunities for Hedge Fund Managers in the ’40 Act Space” and as shown in the chart below:

Asset growth hedge funds mutual funds

Growth opportunities for smaller mutual funds were much greater than the opportunities for smaller hedge funds. In addition to the higher growth rates, albeit from a smaller base, is the sheer fact that the mutual fund industry is significantly larger than the hedge fund industry. This is seldom discussed, but in a game where asset growth often comes from assets moving from one fund to another, rather than from new assets coming into the entire pool, the total assets of the industry are important. As shown in the below chart, also from the Barlcays report, the total assets in the mutual fund industry dwarf those in the hedge fund industry:

Hedge fund vs mutual fund assets

This “opportunity set” is enticing for hedge fund managers that are looking to build a broader base of clients. The good news for advisors is that more hedge funds will be entering the space and managing product that has historically not been available to retail investors. Not every product that comes to market is going to be a winner, and the market is very efficient at sorting out the good from the bad. However, some of the categories in the mutual fund space are already outperforming their hedge fund counterparts as noted in a recent article in InvestmentNews titled “The alternative strategies that outperform with mutual funds.” The article’s author points out that merger arbitrage mutual funds are outperforming their hedge fund counterparts, and not by a small margin.

For any hedge fund managers considering the mutual fund market, the Barclays piece is an excellent reference point.