Global Alternatives Distribution Survey 2018 - The right strategy, at the right price - Aima
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www.pwc.com/assetmanagement Global Alternatives Distribution Survey 2018 The right strategy, at the right price
PwC/AIMA | Global Alternatives Distribution Survey 2018 01
Foreword
The alternative funds industry is This report, a collaboration between PwC
changing fast. Investors are and the Alternative Investment
Management Association (AIMA),
hyper-sensitive to value for money,
examines the two-speed nature of the
and keenly aware of paying alternative funds industry and
predominantly for alpha. They are investigates, through a survey and
also increasingly tuned into interviews, how alternative fund managers
overall outcomes as opposed to are processing it.
simply raw performance and are The report is based on a survey in late-
demanding better and customised 2017 of over 140 PwC clients and AIMA
strategies. And they want all this members managing alternative fund
at fee levels that many in the strategies, with respondents ranging from
small to larger managers in alternative
alternative investments industry fund assets.
would not have considered a
decade ago. The survey was carried out among
alternative fund managers in Europe,
This has significant distribution North America and Asia, many with
implications for alternative fund extensive distribution networks (see
managers, as they adapt to keep pace with Survey Demographics section, below).
these growing demands, examining all PwC also interviewed managers at a
aspects of their business and marketing number of firms on a one-to-one basis to
models and making changes where they uncover specific detail about their sales
can. practices and add colour to the report.
But, in other ways, the industry has Many of their comments and insights are
changed little over the years. Marketing included in the report.
and sales are conducted predominantly by
email and telephone, and introductions
tend to be face-to-face. The array of new Jack Inglis
technology used to market and distribute Chief Executive, AIMA
products in other sectors – including in
traditional fund management – is virtually
Mike Greenstein
non-existent in the alternatives world. This
appears at odds with an investment US & Global Alternative Asset
sub-sector which has led the way in mining Management Leader, PwC
Big Data and using technology to unearth
and implement investment trends.
02 PwC/AIMA | Global Alternatives Distribution Survey 2018
Executive Summary
In this latest phase in the To keep their products relevant and meet While the uptake of digital distribution
development of the alternative the growing expectations of their will gradually expand, alternative fund
investors, managers proactively monitor managers indicate there are barriers to this
funds industry, investor demands
investor profiles. Pension plans, expansion. Chief among them is
are rising fast and expectations are endowment, funds of funds and high net regulation, closely followed by a lack of
sky-high. In terms of reporting, worth (HNW) investors are the biggest in-house expertise to operate platforms
transparency, operational efficiency allocators globally to alternatives. But and also a lack of willingness on the part of
and, of course, investment returns, there are material regional differences. some existing investors to engage and
investors are demanding near- transact via a digital platform.
In continental Europe, funds of funds are
faultless performance in return for the highest allocators to alternatives, and
the higher fees sometimes in the UK the largest investor type is Buyers hold whip hand on fees
associated with the industry. pension schemes. In the US, endowments, With global equities rising more or less
foundations and charities represent a far consistently since early 2009, not all
There is no suggestion that wholesale larger single investment investor type than investors are willing to pay elevated fees
change is required to distribution models. in other regions. for undifferentiated returns that have been
But with more capital being allocated to
available through passive tracker funds.
fewer managers, only those who
Face-to-face access prized above Accordingly, in the current buyers’ market,
understand that performance, strategy,
consistency and reputation must come as a
all else investors can exert considerable pressure
on fees. The 2+20 fee structure for hedge
package are likely to attract the size of The need to customise their offerings is
funds is rapidly disappearing, with 1+10
flows that will allow them to compete driving managers’ marketing behaviours.
more common, and even lower for large
going forward. As capital is driven to fewer and larger
tickets or early bird investors.
alternative fund managers, other
The outcome is everything managers know they must articulate their But the fee adjustment is not completely
value proposition with vigour and clarity over: just over a fifth of respondents say
According to the alternative fund to compete. It is not enough to have a niche they will lower fees, either to attract new
managers surveyed, investors see strategy and peer-beating performance if investors or retain existing ones. A large
performance as paramount. The difference those virtues are not reaching the right fund of hedge funds manager says it has
with the past is that, from the investors’ investors. lowered fees for its key “strategic
perspective, performance is measured partnerships” in order to retain assets, and
through a broader set of outcomes rather Alternative strategies have always
plans to lower fees selectively to attract
than absolute returns. Outcomes in this depended to a degree on face-to-face
new investors.
context being the delivery of solutions to communication and firms are prepared to
specific investor needs, as opposed to a invest considerable sums to get in front of Many alternative fund managers have
more simply defined product, drilling past prospective investors. As a large asset reduced their fees over the course of the
pure performance to look at how that manager attests: “It’s all about people. equity bull run and some may feel they
performance fits with investors’ Digital distribution doesn’t work for have cut their margins to the bone. In
requirements. Whatever the aim, the key alternatives.” addition, their operating costs are rising as
for alternative fund managers seeking many invest in new technology and as
The slow adoption of technology by many
further allocations is to identify individual competition rises for quantifiable
alternative investment firms for
needs of clients and then build in the investment skill. So, fees are not likely to
distribution purposes contrasts strongly
flexibility and skill sets to meet these move much further in the near term. More
with the adoption by alternative firms of
needs. than three-quarters of respondents are not
technology for enhancing investment
planning to lower their fees.
strategies.
PwC/AIMA | Global Alternatives Distribution Survey 2018 03
Politics unlikely to disrupt Finally, the industry is still processing the
buying patterns impact of the recently-enacted
comprehensive US tax reform. This US tax
The exit of the UK from the EU, due to take reform will impact financial markets
place in March 2019, has the potential to broadly and may have impacts on specific
impact the alternative fund management alternative investment strategies. Some
industry the world over. Although a strategies may see a marginal uplift to
transitional period during which little will returns, and some may be able to offer
change until the end of 2020 is being more tax-efficient opportunities to
negotiated, managers have already started investors.
to plan for change. Still, unless a ‘no-deal’
scenario materialises, investors and
managers will be operating in the same
environment for the next two and a half
years.
It is too early to speculate on how the UK
and EU will develop from the point of view
of ease of cross-border distribution of
funds. But it is likely that the EU will most
likely become marginally more restrictive
in the way non-EU funds will be able to be
marketed in the EU (it is already difficult
today), mainly by lowering barriers within
the single market. The UK may become
more liberal as was witnessed, for
example, by the UK regulatory authorities
extending a temporary permission regime
to EU firms to ensure the smooth
operations of those entities under any
potential scenario.
The biggest potential impact on the way
EU markets will be accessed by non-EU
firms will revolve around any changes to
the rules on delegation of portfolio
management. Currently, a great number of
non-EU firms rely on the ability of their
affiliates established in the EU to outsource
portfolio management services to entities
located outside the EU. If this regime
continues without major disruption,
difficulties with access to the EU market
can be significantly mitigated. Brexit has
started a debate on whether and how
delegation rules ought to be changed, but
significant change is unlikely to
materialise in the near future – it is more of
a medium-term prospect.
04 PwC/AIMA | Global Alternatives Distribution Survey 2018
PwC/AIMA | Global Alternatives Distribution Survey 2018 05 Contents The outcome is everything 06 Face-to-face access prized above all else 11 Buyers hold whip hand on fees 16 Politics unlikely to disrupt buying patterns 20 Conclusion 24 Contacts 25
06 PwC/AIMA | Global Alternatives Distribution Survey 2018
1. The outcome is everything
Ever more mindful that alternative What investors want from their This bears out our 2015 thesis that
funds are a premium investment alternative assets investors were starting to expect much
more from their alternative managers,
product often with a premium price According to the alternative fund including performance that meets
attached to them, investors expect managers we surveyed, investors see mutually-agreed expectations.
considerably more from their performance as very significant. The
alternative fund providers than in difference with the past is that
performance is measured in outcomes
the past.
rather than just absolute returns.
This puts the onus on alternative fund
In fact, performance is viewed as even
managers to produce strategies which are
more important than it was in our previous
more tailored to each client and more
(2015) survey. In 2015, performance was
outcome-orientated. The desired outcomes
considered the most important driver for
may be capital preservation, upside
investors when selecting alternative funds.
opportunities, access to less correlated
Although performance scored 8.54 in
assets or a wide range of other
2015, it scored 9.03 in the current survey.1
requirements. As one large US investment
firm noted: “Consistency, track record and
pedigree are what investors really look
for.”
1 Note: Respondents were asked to rank multiple
options. Numbers represent a weighted
frequency of rankings awarded to each option.
PwC/AIMA | Global Alternatives Distribution Survey 2018 07
Figure 1: Rank the following key drivers for selecting investments in alternative asset Offering illiquid and other niche products
funds in the order you think an investor would place them, starting with 1 being the most helps distribution efforts, particularly for
important. smaller alternative fund managers. A
UK-based hedge fund manager, for
Strategy 7.43 example, says its emerging market debt
strategy is a good fit for the large numbers
Risk/reward analysis 6.39 of investors seeking comparatively low
volatility while maintaining relatively high
Performance 9.03
yields.
Meanwhile, one of the large US managers
Experience/longevity/pedigree
of the portfolio manager
7.51 in the survey we spoke to sees alternative
finance, such as direct lending and
Reputation of the
investment manager
6.86 peer-to-peer financing, as particularly
attractive to investors seeking yield.
Fees and expenses 5.67
High-alpha strategies such as Asian
Outcome of investor’s
long-short equity funds and highly-
4.83
operational due diligence concentrated portfolios are also in demand
Identity of the
for investors’ return-seeking “buckets”.
2.74
service providers
Corporate governance
Mixed attitudes towards
4.29
corporate governance
Other 1.66 Reputation is also ranked highly by survey
respondents, but corporate governance is
0 1 2 3 4 5 6 7 8 9 10
ranked low, even lower than it was in
Note: Respondents were asked to rank multiple options. Numbers represent a weighted frequency
of rankings awarded to each option. 2015. The reasons for this relatively low
Source: PwC/AIMA Global Alternatives Distribution Survey 2018 ranking are unclear, but it is likely that
more firms feel they have achieved at least
Amid ultra-low bond yields, performance A large US asset manager notes: “[Past] a base level for corporate governance.
for many investors means accessing steady performance is important, but not the most In fact, managers most likely still have the
returns. Consistency of returns has important factor.” It believes consistency, same regard for governance, but because
displaced high-octane performance as the track record and pedigree are what of the improvement in governance after
main attraction of alternative funds for investors really look for. “It is important to the financial crisis and increasingly less
investors. As one US-UK placement agent know what gap the investor wants to fill in flexibility with respect to governance due
says: “Institutional allocators are yield- their portfolio - do they want pure yield, do to mandatory regulatory requirements,
hungry. They have to meet targets and they want to manage volatility? Many investors are no longer struggling with
need a certain yield. If you can provide investors are outcome-focused and very what good governance looks like and most
that, then you are on to a winner.” mindful of volatility.” funds are readily able to “tick the box” on
Strategy is critical too, managers say. this. Accordingly, it is less of a
Having a clear and defined strategy and differentiator now and therefore less
Asian alternative fund manager
then sticking to it is essential in producing relevant as a selection factor for investors.
distributing mainly in the US:
the outcomes desired by investors. An exception to this possibly being the role
“Absolute return on its own is not
of a Limited Partner Advisory Committee
enough, especially in a year where “Strategic fit is important”, according to a (LPAC). On occasion, the LPAC can fulfil
most managers had good returns.” mid-sized continental European an important function, allowing the
alternatives manager. Investors tend to investor to have a seat at the table and in so
come to a firm looking for a particular doing help manage any conflicts.
strategy with higher return, but less liquid
strategies are in big demand at the
moment, it says.
According to alternatives managers, after
performance the next most important
drivers for selecting assets are experience,
longevity and pedigree of the manager.08 PwC/AIMA | Global Alternatives Distribution Survey 2018
Who’s buying? Irrespective of the quantum of assets
In their own words: corporate available, fund of funds investors are not
governance To keep their offerings relevant and meet
sought after by all firms. As one mid-sized
the growing expectations of their
Asian hedge fund manager told us: “We try
UK alternatives manager: “Corporate investors, managers must keep abreast of
not to accept fund of funds investors, given
governance is important, but not changing buyer profiles.
they generally tend to put a lot of pressure
normally a deal blocker. It can delay the Historically, pension plans, endowments, on fund managers on fees, given the
deployment of capital, but normally funds of funds and HNW investors have two-layer investing structure.” Obviously,
time is given for issues to be resolved. been the biggest allocators worldwide to size and scale come into play here, and
The only managers who fail the due alternatives. But there are considerable larger players may well have the muscle to
diligence process are the ones that regional differences. push for reduced fees.
simply don’t want to change.”
Among continental European investors,
Mid-sized Hong Kong manager with funds of funds are the highest allocators to
mainly US investors: “Governance alternatives and among UK investors,
seems to be less of an issue with pension schemes are the biggest allocators.
investors – probably because there have
been few, if any, recent headlines linked
Figure 2: Which types of investors are you currently selling to in each of the following
to governance failures in the alternative
markets?
funds industry.”
100%
Asia-based active currency manager:
“Corporate governance is a given. Poor 90%
governance equals no cash.”
80%
70%
Like governance, minimum standards of
operational infrastructure have generally 60%
been reached. Managers can expect 50%
investors to run the rule over every aspect
40%
of their operations during the due
diligence phase. There is little “operational 30%
alpha” these days - firms must simply have
20%
at least the minimum standards sought by
an investor (for a particular strategy). 10%
A mid-sized Asian manager says: “All 0%
United United Continental Switzerland Middle East Asia-Pacific Other
investors, or third parties on behalf of States Kingdom Europe
investors, conduct robust operational due (ex-Switzerland)
diligence prior to investing. We take this Non-financial corporations Financial institutions (proprietary) Pension plans/funds
very seriously and spend a lot of time Endowments, foundations and charities Sovereign wealth funds Other funds (incl. funds of funds)
Other institutional High net worth Retail
responding to the interviews.”
Source: PwC/AIMA Global Alternatives Distribution Survey 2018
Indeed, in late 2017, AIMA published a
new edition of its flagship due diligence
questionnaire (DDQ),2 20 years after the
first AIMA DDQ helped to standardise the
due diligence process for alternative fund
managers and investors.
One investment manager interviewed,
said that the due diligence process is
considerably more robust now than even
five years ago.
2 www.aima.org/article/aima-launches-new-due-
diligence-template.html.PwC/AIMA | Global Alternatives Distribution Survey 2018 09
Buyer profiles set to change Some firms, however, are convinced that In continental Europe (excluding
the HNW market holds out great promise Switzerland), and in the UK, pension funds
In the US, endowments will continue to be
and that the only problem is lack of are expected to allocate more strongly to
the most actively-targeted investor type
commitment to it from providers. A very alternatives. However, in Switzerland, the
over the coming three years, as they were
large US traditional and alternative fund HNW segment will still be a big
in the last survey, with pension plans still
manager says: “For US accredited contributor to assets under management,
expected to be the second-biggest allocator
investors, there is a lack of good-quality but matched in the future by funds of
to alternatives.
products tailored to their needs. We feel funds and, increasingly, pension funds.
Only the larger alternative fund managers we have the products to fill this gap and
will be able to access the US pension plan are working on our distribution strategy.” The Sovereign Wealth Fund
market though. A small investment opportunity
In the US, endowments, foundations and
manager noted the difficulties for smaller
charities represent a far larger investment The Middle East continues to represent the
players: “Pension plans mainly invest via
type than in other regions. best market place to source SWF
consultants, so it’s difficult for sub-$1
billion funds to break in because you are In Asia and the Middle East, sovereign investment, offering a substantial
not on the consultants’ radar screen.” wealth funds (SWFs) will continue to be opportunity for alternative fund managers.
the largest single client segment. In Asia, SWFs now allocate almost a quarter of
HNW individuals will remain just the sixth
this is closely followed by endowment their assets under management to
most targeted investor type in the US. One
funds, which will be attracted to alternative funds such as private equity,
reason that HNW is only ranked sixth is
alternative assets as they innovate to seek real estate, gold and infrastructure,
that this category of investors is rarely
out new return streams. The HNW according to a 2018 PwC report. The
targeted individually these days. There are
segment will still be important in Asia, but report, The rising attractiveness of
a number of large alternative platforms,
relatively less so. alternative asset classes for Sovereign
mainly set up by large investment banks,
which allocate to alternative funds on Pension plans in Asia and the Middle East Wealth Funds,3 found that SWFs have
behalf of large numbers of HNW investors. will become much more important sources responded to adverse conditions since
So it is probable that HNW investors have of capital as middle classes in those regions 2014 (essentially falling oil prices), by
now become part of the institutional mix expand and pension fund assets swell. broadening their investment strategies. In
from a marketing standpoint, although not fact, this trend has been observed for about
necessarily from a regulatory view. seven years, with the allocation of SWFs to
alternatives increasing from 19% to 24%
to the end of 2016, according to the PwC
Figure 3: Identify the types of investors your fund intends to target in each country or
report.
region where you expect to actively market in the period 2018-2021.
SWFs allocate about 7% of their total
100%
assets to hedge funds and SWF money
90% represents about 12% of the global hedge
80%
fund industry. PwC expects strong growth
in SWF alternative portfolios as they
70% diversify away further from traditional
60% asset classes.
50% Alternatives offer a number of benefits that
SWFs seek: increased diversification,
40%
principal protection, a hedge against
30% inflation and an increase in portfolio
performance. In other words, SWFs seek
20%
asset classes which provide very specific
10% outcomes.
0%
United United Continental Switzerland Middle East Asia-Pacific Other
States Kingdom Europe
(ex-Switzerland)
Non-financial corporations Financial institutions (proprietary) Pension plans/funds
Endowments, foundations and charities Sovereign wealth funds Other funds (incl. funds of funds)
Other institutional High net worth Retail
Source: PwC/AIMA Global Alternatives Distribution Survey 2018
3 https://www.pwc.com/gx/en/industries/assets/
pwc-world-gold-council-report-january-2018.pdf10 PwC/AIMA | Global Alternatives Distribution Survey 2018
Investors take time before This partly reflects the size and maturity of The primary skill sought is the depth of the
committing alternatives managers compared with candidate’s investor network, suggesting
traditional managers. Around 40% of the there are not typically roles in which
One consequence of the more outcome- firms in the survey were established marketing professionals from other
oriented investor outlook is that decisions during the last 10 years and nearly industries can succeed. This, in turn,
to allocate to alternative investment three-quarters of the surveyed group have suggests the gene pool for marketers in
strategies are taken with extreme care. less than $10bn in assets under alternative funds is unusually small,
This leads to longer lead times. management. engendering intense competition for
Around a quarter (23.5%) of respondents skilled, experienced marketers.
In addition, just over 10% of fund
say lead times to investment are three to managers can call on the expertise of more The other skills demanded reinforce this
six months, with 66% citing longer than 10 full-time in-house marketing message: technical investment knowledge,
timeframes. In other words, investors will professionals. The reasons for this are investment expertise and years of
not be rushed. They are aware that this is a various, but include that marketing can be experience are all valued above general
buyer’s market and are taking their time to outsourced to prime brokers and marketing ability.
choose their strategy and obtain the best placement agents, or may be carried out by
conditions. the same staff who manage the
Alternative fund managers are therefore investments. One large manager of hedge
forced to be patient and accept that they funds interviewed noted that its 40-strong
must play a longer game. international sales team was substantially
replaced due to a higher reliance on
broker-dealers.
Leveraging marketing potential
It is also possible that some funds simply
For the desired investment outcomes to be
undervalue the marketing function and
achieved, alternative fund managers must
allocate insufficient resources to it (or,
have sophisticated processes in place to be
possibly, were simply not raising capital at
able to profile their clients.
the time of the survey).
It is an open question whether alternatives
managers have the structures in place to Highly-specific skills required
find out exactly what investors really want
their investments to achieve. A UK Despite the apparent lack of resources in
placement agent notes: “Hedge funds the marketing functions of some firms, the
assume investors allocate for a reason, same firms are clear about the skills they
without actually asking them what the are looking for when heading to the
reason actually is. If they did, the majority market to hire marketing professionals.
would be very surprised by the answer.”
Communicating with allocators will be Figure 4: Rank the following in order of importance (with 1 being the most important)
with respect to hiring internal personnel to market your fund.
important going forward. As a large US
manager says: “Managers and big 4.5
allocators will be joined at the hip for years
4 4.24
to come on big tickets, so all concerned
need to ensure it is a good long-term fit.” 3.5
3.53
3.42
With the costs of managing alternative 3
investment firms and funds rising, and 2.88
2.5
difficult choices ahead regarding the use of 2.63
technology, there is growing pressure on 2
marketing teams. These teams are often 1.5
sparsely populated compared with their
1
counterparts in traditional asset
management firms. 0.5
Over two-thirds of the alternatives 0
Investment Technical Investor Number of years Other
managers in the survey say their in-house expertise investment knowledge network of experience
sales function consists of between one and
Note: Respondents were asked to rank multiple options. Numbers represent a weighted frequency
five professionals. of rankings awarded to each option.
Source: PwC/AIMA Global Alternatives Distribution Survey 2018PwC/AIMA | Global Alternatives Distribution Survey 2018 11
2. Face-to-face access prized
above all else
The desire to differentiate and tailor To get that all-important first (and perhaps There is a need to explain the complex
their offerings is driving managers’ only) meeting takes persistence. products and strategies that are a feature
Networking at conferences and even of alternative investment strategies, and
marketing behaviours. As capital
informally at corporate and private this is best done within the confines of a
heads for ever fewer firms, the dinners is commonly cited as essential for face-to-face setting. In addition, direct
survivors know the clarity with gaining word-of-mouth momentum. Some communication is critical to achieving big
which they must articulate their larger alternative firms have even set up ticket sales of alternative strategies to
value proposition. It is simply not their own annual conferences, both as an institutional and HNW investors. The trust
enough to have a niche strategy and aid to networking and as an adjunct to necessary for such a large transaction to
branding. take place necessitates a personal
great performance if that message
relationship.
is not reaching investors. “Word of mouth references are important
among pension allocators. They all talk,” While face-to-face meetings are rated the
Alternative strategies have always says a mid-sized UK manager. “They will most important communications tool, the
depended to a large degree on face-to-face not refer per se, but there are a few leaders second and third most important are good
communication. Just as at a private bank in the allocator network and when word old email and phone call exchanges, to
you have a dedicated banker you can meet gets out that they have allocated to a follow up on face-to-face meetings or pave
rather than an outsourced call centre, so it certain fund, then others get interested.” the way for meetings. This was consistent
is with alternative funds. across all regions.
And managers are willing to invest Premium on direct contact The longevity of these “old-school” tools in
considerable sums to get in the same room the alternative investment sector indicates
as prospective investors. The costs of Even amid the current technology
explosion, the ability to look a client in the the sense of permanency and visibility that
hiring local teams, travel and translation some investors require. This is particularly
are all high, but worthwhile in an industry eye is more valuable than any kind of
digital engagement, according to many true when investors are dealing with
where trust is king and personal contact is alternative investment firms in a different
at a premium. alternative fund managers.
region.
As a large US asset manager attests: “It’s all
about people. Digital distribution doesn’t Figure 5: Rank the tools your firm currently uses to communicate with its investors
work for alternatives. Institutional and/or potential investors in order of importance, with 1 being the most important. If
you do not use a particular distribution strategy, do not give it a ranking and tick the
allocators talk to each other, a lot, and
corresponding N/A box to the right.
word of mouth referrals are a big source of
new business.” Website/web-based platform 7.71
For this reason, the sales function is Email 9.81
mutating and charm is no longer sufficient Post 4.68
to sell a strategy. Not long ago, the sales
Face to face 9.83
team would establish contact with and
start to gain the trust of prospective clients Multi-client conference call 7.12
to lay the groundwork for the technical Mobile phone 6.76
side to swoop in and close the deal. Today,
Office phone 8.74
the client may only grant you one chance,
one meeting, so sales people are required Social media 5.03
to be subject matter experts on their firm’s Client conferences 6.69
products.
Third party conferences 6.19
Other 3.04
0 2 4 6 8 10
Note: Respondents were asked to rank multiple options. Numbers represent a weighted
frequency of rankings awarded to each option.
Source: PwC/AIMA Global Alternatives Distribution Survey 201812 PwC/AIMA | Global Alternatives Distribution Survey 2018
The most fruitful distribution A Hong Kong manager notes: “Referrals The consultant model has started to
channels from personal contacts and existing penetrate Asia, where alternative
investors do crystallise into investments strategies are increasingly in demand for
As may be expected in an industry where much quicker than referrals through the diversification purposes. As an Asia-based
direct contact is at a premium, the most prime brokers.” hedge fund manager says: “Referrals from
useful distribution channel is judged to be consultants have worked very well for us,
the fund manager’s staff reaching out to The consultant model has been used in the
bringing brand new investors - not just
engage with prospective investors. After US and the UK for many years and helps
assets from existing investors.”
that, it’s referrals from existing investors. position the consultants as gatekeepers to
Next comes prime broker capital some alternative assets. A large US-based The capital introduction services offered
introductions and recommendations by manager said: “You don’t just need to be on by prime brokers are seen as a less likely
consultants. the consultants’ list, you need to be at the source of assets than in the previous
top of it. Once you are on the list, then the survey. A Hong Kong-based manager says
conversations start and you go from there.” that capital introduction teams are
“over-rated” and that hedge fund
Figure 6: Rank your use of the following distribution channels starting with 1 as the managers should not make prime broker
most important. If you do not use a particular distribution strategy, do not give it a selections based on the capital
ranking and tick the corresponding N/A box to the right. introduction team.
Other (specify in text question below) 7.00
The news media is no more popular as a
marketing channel than it was in the last
Grades from consultants 12.89 survey, where it ranked low as a source of
finding new clients. Most firms
Referrals from existing investors 13.46
interviewed say they avoid media
Other cap intro 11.27 exposure, except where it occurs as a
consequence of speaking at industry
Prime broker cap intro 12.75
events. A common refrain is that there is
Fund of funds platform 11.95 no way of controlling the message in the
media and, worse, the message could be
AIFMD platform 9.83
corrupted by factual inaccuracies and
UCITS platform 10.82 misquoting. Furthermore, there are also
regulatory issues to contend with, as firms
Private bank platform 11.64
are not usually allowed to publicly market
Non-password or unprotected website 11.04 alternative funds.
Password protected website 11.22
Unregistered finders and consultants
11.13
locate investors for the funds
A non-US placement agent or distributor has
11.87
been engaged to distribute the funds
A US registered broker dealer has been
10.84
engaged to distribute the funds
Directors of the fund market the fund 11.94
Staff of the manager engage with
14.31
investors about the product
0 2 4 6 8 10 12 14 16
Note: Respondents were asked to rank multiple options. Numbers represent a weighted frequency
of rankings awarded to each option.
Source: PwC/AIMA Global Alternatives Distribution Survey 2018PwC/AIMA | Global Alternatives Distribution Survey 2018 13
Direct contact has its price The cost of distribution in the EU is And some EU-based managers find AIFMD
deterring some non-EU managers from not useful when marketing to investors in
The obvious problem for an industry
raising funds within the EU. One Hong other member states. The dysfunctional
relying on direct contact is the elevated
Kong manager mainly targeting HNWs nature of the passport attached to AIFMD
cost structure of distribution.
and pension plans in US says: “The means many firms still need to obtain local
As might be expected in an industry where regulatory environment of US is simpler approval for distribution.
access and personal contact is at a compared with European countries.”
Others have embraced the regulated
premium, local marketing team costs and
alternatives fund environment in the EU. A
travel are the biggest marketing costs.
large US asset manager says: “AIFMD is
definitely better than the patchwork of
Figure 7: What is the most expensive aspect of marketing in each of the following private placement regimes. It has created
countries/regions?
an opportunity for larger managers with
60% sizeable resources.”
A mid-sized continental European
50% manager notes that AIFMD is liked by
many alternative managers much more
than when it was first proposed back in
40%
2009. “A lot of jurisdictions have embraced
AIFMD. Many EU investors do not like
30% Cayman funds anymore, leading to the
increased pressure to redomicile
20%
products.”
Overall, alternative fund managers say
10% that Europe (ex-Switzerland and the UK) is
the most expensive place to market funds,
closely followed by Switzerland. The US is
0%
Regulatory Distributor Other service Travel Local Translation Other the third most expensive place to market
filing fees fees provider fees expenses marketing fees funds.
team costs
United States United Kingdom Continental Europe (ex-Switzerland)
Switzerland Middle East Asia Pacific
Source: PwC/AIMA Global Alternatives Distribution Survey 2018
In the US and the Middle East, travel is Figure 8: Which country or region is the most expensive to market in? Which country or
comfortably the most sizeable single cost region is the least expensive to market in? For this purpose, consider all of the types of
for alternative asset managers. A large US expenses listed in the prior question other than travel and any other expenses your firm
fund of hedge funds manager says: “Travel incurs during distribution in each country/region.
and entertainment is not only the most
100%
expensive aspect of marketing to clients in
all regions, but it is the second-largest 90%
expense item after compensation.” 80%
Regulatory filing fees are a substantial cost 70%
of marketing in the US. This is also an 60%
expensive aspect of marketing in Europe, 50%
given the variety of countries and the
40%
different fees imposed by local regulators.
30%
Other notable costs of marketing in Europe
are the need for local service providers and 20%
translations. 10%
0%
United United Continental Switzerland Middle East Asia Pacific
States Kingdom Europe
(ex-Switzerland)
Most expensive
Least expensive
Source: PwC/AIMA Global Alternatives Distribution Survey 201814 PwC/AIMA | Global Alternatives Distribution Survey 2018
The least expensive place is the UK, cited Rebooting the brand Nevertheless, while digital marketing is
by more than 90% of respondents. This not employed to target the current investor
In fact, technology does have a small, but
finding can be partly attributed to the fact base, this might change as the millennial
important, place in the distribution efforts
that 30% of respondents have their generation moves up the wealth chain.
of alternative fund managers. In their
headquarters in the UK. It also reflects the
branding efforts, most firms build websites Looking ahead five years’, some of the
fact that decision-makers tend to work in a
in order to bolster their web presence. many marketing tools employed by
concentrated geographic area.
alternatives managers will only change at
Furthermore, costs for translation are low While these websites tend to be for
the margins.
since staff at all parties speak English. The information purposes only and are not
next cheapest places to market funds are interactive or transaction-enabled, The primary means of communication will
Asia-Pacific and the Middle East. attention to design and detail are still be face-to-face and by email. However,
important in the creation of the website. there will be an increase in importance of
Technology revolution slow to Even firms that do not actively promote web-based platforms and, to a lesser extent,
their brand tend to have website presence. of social media. Many firms will still use
impact distribution
old-fashioned post to communicate with
Technology has the potential to bring Social media, on the other hand, ranks low
clients and the landline to talk to them.
down the high costs of distribution in the as a means of communication, as it did in
alternatives industry, but currently only our last survey. Despite the hype, not
plays a minor role. According to many in everyone wants to communicate by
the industry, it might never play a big part, Facebook or be targeted by Twitter and
given the highly specialist nature of many LinkedIn messages. The feedback in our
alternative fund strategies, coupled with one-to-one interviews even suggests a
an investor base that many feel is resistant sales approach leveraging social media
to the automation of processes. might deter some investors.
A Hong Kong-based manager in the survey,
Figure 9: Which of the channels below does your firm use to promote its brand?
for example, says his firm has “no interest
in digital marketing”, other than using 70%
email to send out monthly newsletters to
60%
potential investors.
50%
The low utilisation of technology for
distribution contrasts strongly with the 40%
adoption of technology for enhancing 30%
investment strategies. Hedge funds, in
particular, were early adopters of Big Data 20%
techniques to uncover market and other 10%
trends that could give them an investment
0%
edge. Alternative fund managers have also Articles in Events Social Adverts TV Website White None of Other
third party media appearances papers the above (please
been at the forefront of using technology in media specify)
their middle offices. But, up until now, Source: PwC/AIMA Global Alternatives Distribution Survey 2018
technology has not widely penetrated their
marketing and distribution strategies.
Another Asia-based manager says there is
no digital aspect to the firm’s marketing
activities “since the target clients are
high-end investors who prefer face-to-face
tailored services.”
That is not to say alternatives funds are not
interested in new technology. Notably,
some interviewees wondered if their peers
were using technology for marketing and
distribution. The implication is that they
would like to harness technology if
possible, but do not currently see how it
can aid them.PwC/AIMA | Global Alternatives Distribution Survey 2018 15
Obstacles to digital Figure 10: Rank the tools your firm uses to communicate with its investors and/or
potential investors in order of the importance you think they will have in 5 years’ time,
While the usage of digital distribution with 1 being the most important.
platforms will gradually expand to
accommodate millennials, respondents to Website/web-based platform 8.85
the survey indicated there are barriers to
this expansion. Chief among them is Email 9.40
regulation, closely followed by a lack of
in-house expertise to operate platforms Post 4.10
and also a lack of willingness on the part of
Face to face 9.36
existing investors to engage and transact
via a digital platform.
Multi-client conference call 6.70
“Regulation is definitely a barrier,” says a
mid-sized UK hedge fund manager, “but Mobile phone 7.24
once you have the scale to invest in the
Office phone 7.77
infrastructure it can be managed.”
A Hong Kong manager cites privacy Social media 6.34
regulation as a key challenge: “In terms of
Client conferences 6.06
digital distribution, the General Data
Protection Regulation (GDPR) is a big deal.
Third party conferences 5.59
Separately, although not a regulation per
se, cybersecurity issues are also potentially Other 3.00
disruptive to digital distribution.”
0 1 2 3 4 5 6 7 8 9 10
Note: Respondents were asked to rank multiple options. Numbers represent a weighted frequency
of rankings awarded to each option.
Source: PwC/AIMA Global Alternatives Distribution Survey 201816 PwC/AIMA | Global Alternatives Distribution Survey 2018
3. Buyers hold the whip hand on fees
In a buyer’s market, investors can Fees may have reached their low Meanwhile, an Asia-based manager
exert considerable pressure on point believes the multi-year track record of its
capacity-constrained, non-correlated
issues such as fees and Alternative fund managers have reduced strategy is sufficiently impressive not to
transparency. By common consent, their fees over the course of the equity bull have to lower fees. It has suffered no
the 2+20 fee structure for hedge run and some may feel they have given negative years and says it is “not
funds is quickly becoming a relic, enough ground. This is particularly the interested” in talking to investors that seek
case for managers who are seeing their
with 1+10 more prevalent and even to negotiate on fees.
costs rising through investment in new
sometimes lower for very large technology and demand continuing to rise But the fee adjustment is not completely
tickets. for proven investment skill. over: just over a fifth of responding
managers say they will lower fees, either to
With global equities having risen So, fees are not likely to move much attract new investors or retain existing
consistently since early 2009, investors are further in the near term. More than ones. A large fund of hedge funds manager
balking at paying high management fees, three-quarters of the survey respondents says it has lowered fees for its key “strategic
particularly in an environment where say their firms are not planning to lower partnerships” in order to retain assets, and
returns have been available through their fees. also plans to lower fees selectively to
simple passive funds with much lower fees.
A large US asset manager says fees are now increase the number of new investors.
far less sensitive in its alternative range Other managers have been willing to
than in the traditional business. adopt innovative fee models, agreed in
advance with investors. Some managers,
for instance, receive no management fee,
Figure 11: Are you planning to lower the fees offered in your fee structures?
but a higher performance fee for any alpha
90% generated. Indeed, there has been a
growing interest in the 1+30 concept,
80% where managers are primarily rewarded
for true performance, with a minimal
70% management fee to cover base level
running costs.
60%
50%
40%
30%
20%
10%
0%
No, fees are staying Yes, to increase the Yes, to retain current Yes, both to increase
the same number of new investors the number of new
investors investors and to retain
current investors
Source: PwC/AIMA Global Alternatives Distribution Survey 2018PwC/AIMA | Global Alternatives Distribution Survey 2018 17
Which products will see future demand?
The fees and outcomes story is accompanied by another shift: to liquid alternatives (in certain regions).
According to the survey findings, liquid alternatives funds are expected to be popular with endowments, pension schemes and funds of
funds across all regions. A full third of all HNWs investing in alternatives are expected to do so through UCITS funds and 44% of retail
investors are expected to do so. In continental Europe, excluding the UK and Switzerland, UCITS are expected to be an even bigger part
of the mix across all investor types, with the exception of SWFs.
In Asia, the commingled structure will be strong. There is also predicted to be some use of UCITS across all client segments, as the
UCITS brand continues to hold the trust of Asian investors.
Figure 12: Continental Europe (ex-Switzerland)
70%
60%
50%
40%
30%
20%
10%
0%
Non-financial Financial Pension Endowments/ Sovereign Other funds Other High net worth Retail
corporations institutions plans/funds foundations/ wealth funds (incl. funds institutional
(proprietary) charities of funds)
Hedge fund Hedge SMA 40 Act fund UCITS PE fund PE SMA RE fund RE SMA Loan fund Credit fund Credit SMA Other N/A
Source: PwC/AIMA Global Alternatives Distribution Survey 2018
In Switzerland, traditional commingled alternative fund structures, as in the US, will continue to dominate. But there too, UCITS will
be well represented in investors’ portfolios, particularly among financial institutions, and in the HNW and retail segments.
Figure 13: Switzerland
80%
70%
60%
50%
40%
30%
20%
10%
0%
Non-financial Financial Pension Endowments/ Sovereign Other funds Other High net worth Retail
corporations institutions plans/funds foundations/ wealth funds (incl. funds institutional
(proprietary) charities of funds)
Hedge fund Hedge SMA 40 Act fund UCITS PE fund PE SMA RE fund RE SMA Loan fund Credit fund Credit SMA Other N/A
Source: PwC/AIMA Global Alternatives Distribution Survey 201818 PwC/AIMA | Global Alternatives Distribution Survey 2018
More alternatives managers are looking to The UCITS structure may also be a way for In the Middle East, again the commingled
break into the liquid alternatives space, to alternative fund managers to position alternatives fund structure will dominate.
which they are typically under-exposed. A themselves to access millennials in the SWFs are expected to use separate
continental European hedge fund manager future, possibly via digital marketing and accounts. UCITS will also be used to some
says: “Liquid alternatives are a big growth trading. It may also help overcome extent.
area for us. Lots of our alternative products restrictions, particularly in parts of
are being structured into UCITS in Europe, on using offshore funds.
particular, and all are taking in large
The exception to the widespread
flows.”
enthusiasm for liquid alternatives is in the
US, where the established commingled
hedge fund structure is expected to remain
the most popular for all investor types.
Figure 14: Asia Pacific
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Non-financial Financial Pension Endowments/ Sovereign Other funds Other High net worth Retail
corporations institutions plans/funds foundations/ wealth funds (incl. funds institutional
(proprietary) charities of funds)
Hedge fund Hedge SMA 40 Act fund UCITS PE fund PE SMA RE fund RE SMA Loan fund Credit fund Credit SMA Other N/A
Source: PwC/AIMA Global Alternatives Distribution Survey 2018PwC/AIMA | Global Alternatives Distribution Survey 2018 19
Managed accounts to dominate The widescale prevalence of managed
accounts would seem to support the earlier In their own words: managed
new business
finding that many alternative fund accounts
According to alternatives managers, managers are increasingly being asked to
deploying alternative investment tailor their offerings to match the A mid-sized UK manager: “In the core
strategies within a managed account have objectives and target outcomes of specific business, we are doing more and more
become more popular – 55% of firms plan investors. one-off mandates, responding to the
to offer at least one managed account tailored needs of investors.”
solution to investors.
Active currency manager: “The
managed account can be a variation on
Figure 15: Are you planning to launch this type of fund?
an existing strategy or very client-
tailored. The client typically wants
Hedge fund strategy managed something close to the commingled
as a comingled private fund
strategy but with a bit more flexibility,
Hedge fund strategy such as adding or reducing leverage
managed in a UCITS
when they feel more positive or negative
Hedge fund strategy managed in a US about the strategy.”
registered investment company
Hedge fund strategy managed as
a separate account or fund of one Meanwhile, 49% of managers across all
Private equity strategy managed regions surveyed planned to launch a
as a comingled private fund commingled alternative investment fund
Private equity strategy managed in and some 40% planned to launch an
a separate account or fund of one alternative investment strategy within a
Real estate strategy managed UCITS structure. Those who are not
as a comingled private fund
launching UCITS funds tend to have very
Real estate strategy managed in niche or illiquid strategies, or say UCITS
a separate account or fund of one
funds may cannabalise sales of the less
Direct lending strategy managed liquid fund structures.
as a comingled private fund
Direct lending managed in a
Disintermediation of core banking
separate account or fund of one activities is still taking place – 18% of
Other private credit strategy managed
managers said they would launch a direct
as a comingled private fund lending strategy managed as a
Other private credit strategy managed commingled fund. Meanwhile, 17% were
in a separate account or fund of one planning to launch a private equity
commingled fund.
Other
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Source: PwC/AIMA Global Alternatives Distribution Survey 2018 Yes No20 PwC/AIMA | Global Alternatives Distribution Survey 2018
4. P
olitics unlikely to
disrupt buying patterns
The exit of the UK from the EU, In the survey, 29% of alternative managers However, the vast majority of EU AIFs
provisioned for March 2019, has a surveyed say they use European funds and managed by UK AIFMs are not in the UK.
the AIFMD passport as a means to access In addition, many UK managers already
number of potential impacts on the
investors in the UK. have AIFM structures or UCITS
fund management industry, some management company structures in the
of which will be felt the world over, Assuming the UK withdraws from the EU
jurisdictions where their EU AIFs are
single market, the UK will become a “third
but most of which are unlikely to established. Those which do not are
country” under various EU rules, including
generate significant change in the the UCITS Directive and the AIFMD. This
looking to understand whether it is better
next two years unless there is to create new licensed entities or whether
will require UK alternative fund managers
to appoint existing AIFMs and/or UCITS
complete break-down in to change the way they do business with
management companies that specialise in
negotiations. EU investors and clients. UK AIFMs
providing a range of platform services
marketing European AIFs will no longer
On the face of it, the UK alternative while delegating portfolio management to
qualify for the marketing passport under
investment industry could face the greatest non-EU entities.
AIFMD and will be treated as non-EU
challenge as a result of Brexit. A US-UK AIFMs (similar to the way that non-EU Depending on whether and how the UK
placement agent says: “The AIFMD has a currently operate in the EU). adjusts its rules in the face of leaving the
good framework and we think Europe will EU single market, Brexit could also impact
take London’s financial prominence away on the way that EU alternative fund
over time. The industry will have to managers distribute to UK investors.
adapt.”
The UCITS Directive does not contain
Figure 16: My firm is currently accessing the UK market primarily through: provisions relating to third countries. As a
result, UK-domiciled UCITS and UK-
35% domiciled UCITS management companies
will be considered to be non-EU AIFs and
30% non-EU AIFMs, respectively, after Brexit.
But because the vast majority of alternative
25% UCITS are not domiciled in the UK, the
main issue will be to what extent UK
20% managers will be able to provide portfolio
management services to the EU entities on
15%
an outsourced basis.
10%
5%
0%
Cayman European European Other non-EU Not marketing
AIF - NPPR AIF - Passporting AIF - NPPR AIF - NPPR to UK investors
Source: PwC/AIMA Global Alternatives Distribution Survey 2018PwC/AIMA | Global Alternatives Distribution Survey 2018 21
EU-27 domiciled UCITS distributed into the UK will also be impacted by the loss of
passporting into the UK, but they will still be able to distribute to professional investors in
the UK. Firms which are active in the retail market may be disrupted more severely. In
December 2017, the UK Government provided some welcome clarity on what this means
for EU firms passporting into the UK by announcing a plan to legislate for a temporary
permission regime which would enable relevant passporting firms and funds to operate
as they do today until a replacement regime is implemented in the UK.
Figure 17: How important will the UK be as a fund raising destination for your firm post
Brexit?
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
More significant Less significant Stay the same
Source: PwC/AIMA Global Alternatives Distribution Survey 2018
Despite the uncertainty, some 81% of Views of Brexit from outside Europe are
respondents say that after Brexit they will mixed, which is not surprising given the
fundraise in the UK as much as they have many uncertainties over Brexit that still
done in the past. Only 11% said the UK will exist. One Asian manager said the UK
be a less significant destination for would be “more rational and flexible” after
sourcing assets. Some 7% even said the UK Brexit, so it would be a more natural place
would be a more attractive place to raise to source assets.”
assets in the future, possibly because
However, another Asia-based manager is
investment firms believe the UK may be
considerably less positive on the UK as a
able to operate outside the AIFMD regime
source of funds: “We were hoping to use
after Brexit. It is far from certain this will
the UK as a stepping stone to go into
be the case, however.
Europe by using passporting. Now we will
A mid-sized UK hedge fund firm says it is focus our efforts more on America.”
“very bullish about Brexit”. Even if the
This last comment is intriguing in that it
going is tough in the immediate post-Brexit
suggests that the EU is not a natural second
period, the firm says it is confident it can
choice if the UK is a less promising source
deal with any issues that arise.
of fundraising. Indeed, 86% of respondents
The view of continental European said the EU 27 would be no more and no
managers interviewed as part of the less attractive post-Brexit.
survey is that UK firms contain much of the
available talent in Europe, so a workable
structure will be found. “People will figure
out a way to get flows to the most talented
managers,” one alternative fund manager
says. So just as UK managers will need to
find ways to source EU-based capital after
Brexit, so EU-based investors face
challenges in accessing the wealth of talent
and strategies that reside within the UK.You can also read
