FundFire – Hedge Fund Competition Heats Up as Regulation Intensifies

in-the-news

2015-01-21

By Laura Suter 

Hedge funds in the U.S. are facing tougher competition as many managers are refocusing their attention on their domestic market, amid new regulation that makes asset gathering in Europe harder.

The complex regulation in Europe as a result of the Alternative Investment Fund Managers Directive (AIFMD) has led many U.S. hedge funds to pull back from the market, hoping to make up that fundraising shortfall in their home market.

Third-party marketers have highlighted the retrenching to domestic markets as a key trend for U.S. managers in 2015.

Stonehaven, a N.Y.-based placement agent, said one of its top trends for 2015 is that the “increasingly complex and challenging patchwork of global private placement regulations … will cause most U.S. fund managers to focus the majority of their marketing efforts domestically.”

Meanwhile, Virginia-based third-party marketer Agecroft Partners expects AIFMD will “significantly reduce hedge fund marketing activity in Europe,” naming it as a top trend for the year. Agecroft predicts that the average U.S. hedge fund currently raises about 25% of its assets from Europe.

Under the AIFMD rules, any alternative fund manager, inside or outside the European Union (EU), that wants to market in the EU must comply with each jurisdiction’s private placement regime, which can vary widely. These regimes include reporting requirements, disclosures, and cooperation agreements between countries.

Competition in the U.S. market is already high, and these managers re-focusing on their home turf is only going to make the battle fiercer, says Don Steinbrugge, managing partner at Agecroft.

“The U.S. has become extremely competitive,” he says. “Today I estimate there are approximately 15,000 hedge funds, and in addition to that there is a greater focus on marketing in the U.S. by a majority of those funds that find it difficult to market outside the region.”

Some managers are now focusing on the U.S. entirely for their growth. “I have heard, anecdotally, from some firms that they are focusing on marketing products entirely in the U.S. and as it comes to Europe they are counting on reverse solicitation. They are not thinking of [the European] market for future growth,” says Todor Todorov, investment consultant at Towers Watson.

This means that having good performance is not enough for a hedge fund to survive in the U.S. anymore, says Steinbrugge, as it was before 2008. “If a hedge fund wants to grow their business they need to invest in a strong, institutional-quality distribution effort,” he adds.

Hedge funds now need to rank well across all evaluation factors used by investors, have a well-refined marketing message that is concise and consistently delivered, and have a high volume of client meetings to build brand awareness, says Steinbrugge.

Small to mid-size U.S. managers will be hit the hardest, as they lack the resources and money to be able to navigate the complex regulatory market in Europe, says David Frank, CEO and managing partner at Stonehaven. “This is particularly true for managers that are under $1 billion, and especially those under $500 million. We are not finding these managers want to go through most of that work,” he adds. “It’s resource intensive, but those with the greatest resources will go and do it.”

Smaller managers have also been hit harder as the trend in the U.S. over recent years has seen more assets flow to the largest managers, says Steinbrugge. “This is further hurting the growth of smaller managers,” he adds.

Some U.S. hedge fund managers are pausing their European business awaiting a ’passport’ to be introduced, which will permit marketing EU-wide. A version for non-EU managers is expected in July this year.

“Some people are taking a wait-and-see approach to see what the passport looks like when it comes into play, what the requirements finally end up being. Others are taking a cautious approach and trying a country or two before going into more countries,” says Jennifer Wood, director and head of asset management regulation at the Alternative Investment Management Association.

However, one regulation expert, who asked to remain anonymous, does not expect a large pick-up in U.S. managers marketing in Europe after the passport is released, as it is still not clear if they could comply with the full rules of AIFMD, while also remaining in compliance in their home country.

U.S. managers need to look at the long term, says June Oakes, solutions director for SEI’s investment manager services division. “What U.S. managers need to be doing right now to navigate AIFMD is really not to look in the short term necessarily, but they really look at it strategically … They need to consider if Europe is going to be an opportunity for them that is worth the costs and the effort to comply with what they want to do long-term,” she adds.

One potential winner from the complex regulation, in Europe and elsewhere, is the U.S. hedge fund of funds manager. Those that are willing to invest the resources in navigating the regulation could “act as a conduit for non-U.S. fund flows into U.S. managers,” says Frank.

Funds of funds have suffered outflows, and must “evolve to create new value,” says Frank. “There are two parts to a fund of funds – one is manager allocation and the other part is distribution. If you can solve a problem in distribution, particularly in countries with challenging private placement regulation for emerging managers, then that creates value for investors seeking that exposure,” he adds.

Fund of funds managers at larger firms may have the edge in working out the requirements and navigating the new regulations, says Frank. “If fund of funds managers at Goldman Sachs want to figure out how to do business in a given country, they have internal resources that can help them solve problems that other firms would need to lean on external counsel to solve,” he adds. “I could see that playing a bigger role.”

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About Stonehaven, LLC

Stonehaven is an industry leading global placement agent focused on hedge funds, private equity, real estate, venture capital, private placements, and long‐only strategies. Stonehaven’s platform serves as a nexus between select investment opportunities and the institutional investment community with a talented capital raising team and robust infrastructure. The Firm’s dynamic structure fosters an ever‐ evolving stable of distinctive managers to match the demand across the diverse investor community. Founded in 2001 by CEO David Frank, the Firm is entirely management owned, giving it complete independence to continue pursuing its entrepreneurial approach while maintaining the highest ethical and regulatory standards.

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