Hedge funds face competition for long/short assets

Growing numbers of traditional investment managers are launching equity long/short strategies as they look to diversify their business lines and compete with hedge funds.

A good majority (65%) of traditional investment managers currently offer some form of long/short fund. This compares to just 33% in 2008, according to a research report* by Finadium.

Traditional investment managers currently account for 19% of assets under management (AUM) in equity long/short portfolios in hedge fund account structures. This is expected to rise to 28% by 2012.

By 2012 Finadium projected traditional investment managers will have $345 billion worth of equity long/short assets, up around 75% from $204 billion today. Equity long/short assets managed by independent hedge funds will grow by just 25% to $580 billion by 2012 from $460 billion at present.

Regulated long/short mutual funds, which currently have just $27 billion in AUM, are seen by the report as a "substantial growth opportunity for both hedge funds and traditional asset management firms".

The amount of capital invested in long/short mutual funds could "grow twenty fold" over the next five years if financial advisors recommend retail investors include an allocation to hedged products within their portfolios said the report.

The interest among traditional investment managers in long/short strategies could be an opportunity for some hedge funds to expand their businesses, Finadium said. "Hedge funds with the interest and ability to partner with larger managers could see new requests for their services as long/short assets rise across the industry," the report noted.

The findings are based on research carried out by Finadium and commissioned by Pershing, the prime brokerage arm of BNY Mellon. Finadium surveyed the top 300 US investment managers by AUM for the report.

* Competition and Convergence: The Evolving Landscape for Hedge Funds by Finadium.