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Traits of Success

What hedge fund managers think it takes to succeed


Alternative investment firms have evolved tremendously over the course of the last 20 years, particularly since the financial crisis. But has the magic formula for success changed in that time? This is a key question that EY and the Alternative Investment Management Association (AIMA) address in this research report.

What we have found confirms that some fundamentals are timeless – the need to invest in people and business infrastructure, for example, or the value of growing your relationships with your clients, the funds’ investors. We have learned that some facets of a successful firm have clearly evolved in recent years, in particular around transparency and the construction of sustainable, long-term businesses.

For a hedge fund business, as much as any other business, success is in large part driven by articulating a clear message in advance, delivering what you have promised and doing so reliably over time. This applies to relationships with both investors and staff, in which alignment of interests (financial and philosophical) and culture emerged as critical factors in our survey.

Our interviews with successful individuals in the industry clearly show that it continues to evolve rapidly. In part, this reflects the growing maturity of individual firms, their desire for continuity and their need to retain as well as attract investment capital. It is also a response to changing market conditions, such as low yields and the secular reduction in financial market liquidity.

The adaptability of the industry is one of its great strengths. Our research makes it clear that successful alternative investment firms are already responding to the changing demands being placed on them. The growing focus on transparency and fee flexibility is an example of this willingness to change. As the changes develop, managers’ views of success will no doubt continue to evolve.

The ability to manage the process of change will be critical. The industry needs to remain at the cutting edge of investment and defend its worth. For individual firms, the ability to both remain relevant, and stand out from their peers where possible, both now and in the future, could be the ultimate benchmark for continued success.

Jack Inglis, CEO, AIMA

Executive summary

It is a time of great change for the hedge fund industry. EY’s 2016 Global Hedge Fund and Investor Survey identified several of the key challenges currently facing the hedge fund industry, including lower levels of fund performance across some hedge fund strategies, rising investor expectations, pressure on fees, and requirements for robust operating models. The survey also concluded that facing these challenges head-on would give hedge fund managers the finest chance for success.

This paper is the report of a joint research project by EY and The Alternative Investment Management Association (AIMA). It seeks to identify common characteristics of successful hedge fund managers, not only across strategy and geography but also over time. We hope that the observations in the paper will be useful and provide interesting insights for managers to consider amid an array of challenges, both now and in the future.

Our research focused primarily on the hedge fund business model, although the findings are also relevant to other specialist asset managers across the wider spectrum of alternative asset managers. To carry it out we turned to those who know best, interviewing more than 40 senior individuals at hedge fund firms in the US, the UK and Asia Pacific that account for more than $100 billion in assets under management (AUM). The firms our interviewees represented ranged from emerging firms (with less than $500 million AUM) to much larger firms (up to $15 billion AUM). Their answers provide us with invaluable insight into the factors most likely to contribute to success in hedge fund management.

We did not set out to define “success” for a hedge fund manager. It became clear during our conversations with hedge fund managers that success means different things to many people and belies any attempt at a universal definition. This not only reflects the industry’s diversity, but also its growing maturity in many markets.

Manager descriptions - key

Emerging manager: less than $500m AUM

Small manager: less than $1bn AUM

Midsize manager: between $1bn–$10bn AUM

Large manager: more than $10bn AUM

We deliberately looked beyond the obvious requirement of investment performance – although here, too, there were different opinions as to what constitutes good performance. Instead, we started by accepting good performance as a sine qua non for the whole industry. Besides, the rapidly evolving demands of a sophisticated investor population are making it increasingly hard for good performance to shelter any shortcomings in other areas – particularly over the long term. We also did not set out to find a blueprint for success. Instead, we sought to identify characteristics and behaviours that may contribute to a firm’s success, noted common factors and explored differences of opinion. We examine the results of this process in our key findings below, which we group into three areas that hedge fund managers view as being vital to success. These are:

• managing people and culture;

• managing the infrastructure; and

• managing investor relationships.

Our key findings include:

• the vital importance of succession planning to a hedge fund firm’s longevity;

• the need to balance a strong operational infrastructure within the firm with a vibrant culture that is not too “institutionalised”;

• the importance of adapting to changing market conditions while retaining a consistent investment approach;

• the need to demonstrate increased transparency toward investors while deciding on the optimal amount of portfolio level disclosure to provide to investors;

• the readiness to take a flexible approach to fee structures, lock-ins and other investment terms in the quest for strong alignment;

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About The Hedge Fund Journal

Informing the Hedge Fund Community. With access to some of the industry’s biggest names and an astute and talented group of writers and contributors, The Hedge Fund Journal has established itself as a trusted source of information on the hedge fund industry.