Interview with Tony Griffiths, Cerulli Associates

Tony Griffiths is parttony griffiths of Cerulli Associates’  European institutional research team, writing across a range of global and European research journals and reports. Prior to joining Cerulli, he spent six years as a financial services trade journalist in London, most recently as the editor of global hedge fund publication HFMWeek. You recently published the European Alternative Products and Strategies (EAPS) 2016 report. How did you gather the data and what were your key findings?
Tony Griffiths: Interest in alternative beta and strategies offering an illiquidity premium played prominent roles in EAPS 2016 – our first annual alternatives report outside North America – but it was clear early on that alternative UCITS was going to be the star of the show. If the appetite for such funds was no real surprise then the scale and range of said appetite was. No longer is alternative UCITS purely the domain of private bank clients: asset managers will now find increasing interest among institutional investors, notably conservative continental allocators looking to replace the once high yields of their debt holdings, and insurers, more generally, keen to reduce the capital charge for alternative strategies under Solvency II.
For alternative UCITS managers this means new channels of interest and bigger potential tickets. But it also requires some fresh thinking when it comes to fund terms, and raises some important questions about the way product developers position themselves and the extent to which their internal structures reflect a marketplace where the lines between retail and institutional, alternatives and traditional are becoming blurred.
In terms of data gathering, all Cerulli reports are built on interviews and surveys, and EAPS was no different. We conducted 47 face-to-face and telephone interviews with international asset managers, end investors and service providers, and received 96 responses across three surveys; one of asset managers, one of hedge fund managers and one of end investors, mainly pension funds. The term “alternatives” is often defined differently. How did your survey participants define it?
Griffiths: EAPS 2016 includes a series of questions that we asked participants in both the asset manager and end investor surveys and while all produced some unexpected results, few offered quite as diverse a range of answers as ‘what do you consider an alternative investment?’ For example, more than 90% of asset managers Cerulli surveyed considered long-short equity an alternative investment strategy, whereas a little over half of investors felt similarly.
But the split goes deeper than that: a manager’s strategy may or may not be considered alternative depending on the country into which it is being sold, the investor it is being sold to, or the wrapper it is being sold in. UCITS is again a prime example, with some investors using the regulatory stamp of approval as an opportunity to move the likes of long/short equity into their, typically less restrictive, equities buckets. Which traits and fund features are a red flag for investors?
Griffiths: The converging worlds of alternative and traditional fund management have created heightened expectations across the board. As a result, many of yesterday’s fee models and operational infrastructures are today’s red flags. The traditional 2/20 fee structure remains a bone of contention – notably the 2% management charge – and managers’ risk management systems are facing particularly intense scrutiny. That said, through a mixture of regulatory initiatives, investor pressure and managerial action, many of the investor community’s bigger post-crisis issues – such as non-independent valuation and cash management – have been addressed, leaving fewer funds raising the red flag and more raising the eyebrow.
Another key finding of EAPS 2016 – and one that will be of particular interest to traditional managers launching alternative UCITS products – was that investors are increasingly wary of alternative funds run by managers from a traditional background. That is, it is easier to convince an investor that a long-short manager can go long-only than a long-only manager can go long-short. Which fund terms and manager attributes do investors then look for and is there a difference regarding country and investor type?
Griffiths: As noted above, choosing an alternative investment fund is becoming less about red flags and more about selection criteria. The UK, dominated by the recommendations and buying power of the global investment consultants, is perhaps the prime example of this trend. But funds across Europe are under increasing pressure to hit the ‘magic marks’, specifically $100 million in assets under management and a three year track record, at which point the larger investors and consultants at least will consider them for allocations and/or ratings.
Beyond track record, investors of all shapes, sizes and nationalities want to invest in a fund managed by a team bonded by time and a shared culture. Environmental, Social and Governance (ESG) guidelines are also important to investors, although not quite in the way we expected in the run up to EAPS 2016, even in the Nordics. The UCITS wrapper, meanwhile, may not be a pre-requisite, but its ‘scalability’ – i.e. the extent to which UCITS funds can be offered to different investors and packaged for different services – is giving certain managers an advantage among fund selectors. Which distribution channels are growing and where should managers be concentrating their marketing efforts?
Griffiths: The appetite for alternative UCITS shows no sign of abating, with opportunities for managers among institutions in Northern and central Europe, as well as growing interest among private banking platforms in Southern Europe. Retail and DC pension platforms are yet to embrace alternative UCITS beyond the multi asset offerings of brand name traditional asset managers, but there are signs that this could change.
In the UK, investment consultants and intermediaries will increase their sphere of influence as interest in fiduciary management services grow. The market share of consultants in Switzerland and Germany – where regional alternatives specialists have made headway – will likely follow a similar pattern. Ultimately though, if you’re not an established brand and/or managing UCITS funds, Europe’s alternatives market is going to be a hard nut to crack. Thank you for the interview.