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Finding Nirvana in Alternatives


The alternative mutual fund landscape is crowded with traditional fund managers looking to diversify their offerings with hedge-like mutual funds.

However, a new report highlights the hurdles that traditional managers now face trying to extend themselves into the dark side.

According to the study by consulting shop McKinsey & Company, traditional asset managers are convinced of the growth potential for alternative investments, and are gearing up to provide them to their clients, but they are also realistic about their ability to succeed in the alternatives space.

For example, in Europe and the U.S., slightly more than one-third of the traditional asset managers surveyed consider themselves well- or best-positioned to win mandates in alternatives.

In contrast, more than 75% rate niche (specialized) alternatives players as well- or best-positioned to win, and 70% see the large diversified alternatives players as well- or best-positioned to win.

Institutional investors also echo these same sentiments, rating specialist alternatives managers more highly than traditional managers in risk management and technical product expertise of the sales force, according to the report.

For investors considering awarding alternatives mandates to traditional asset managers, lack of track record and credibility are primary concerns. Half of the respondents to the survey of institutional investors, for example, say they are more likely to invest with hedge fund managers with established records of three or more years.

McKinsey also noted that traditional asset managers looking to gain quick traction in the alternative space often turn to acquisitions or team lift-outs. But busted deals far outnumber successful ones in the alternatives space.

Other firms take minority stakes in boutique hedge funds to dip their toes in the fast-moving alternative stream. But unless the stakes include short-term revenue and a buyout clause down the road, McKinsey warned that the asset manager can end up serving as little more than a distribution arm for the boutique.

"Asset managers with a longer-term view can build organically or leverage existing capabilities. However, this is a long, hard road, particularly in the institutional space where consultants have a strong bias for specialist alternatives managers with established track records," according to the report.