Investors should put pressure on hedge fund managers to innovate and reduce fees, consultancy giant Willis Towers Watson has argued. 

Asset owners should change their approach to hedge fund investment by isolating and taking advantage of the unique skills a manager may have, the consultancy said a in a recent report.

In the report – titled ‘Hedge funds: A new way’ – Willis Towers Watson also suggested avoiding generalist, multi-strategy hedge funds.

In addition, investors should refuse simply to accept products that are available, instead influencing managers to make innovative new mandates, designed in the context of a total portfolio.

Owners should also focus on paying lower fees for hedge funds and encourage more transparency, according to the consultancy.

Sara Rejal, global head of liquid diversifying strategies at Willis Towers Watson, said: “We firmly believe that hedge funds continue to have a distinct competitive advantage and a clear role to play in institutional portfolios, largely due to their unconstrained investment mandate.”

However, in the last few years funds have become too focused on issues tangential to investment performance.

“Simply assuming that the macroeconomic situation will improve and boost returns is a strategy of hope, and we’re urging investors to adopt a new approach to ensure they’re selecting the right manager, mandate and fee structure for their hedge fund portfolios,” Rejal said.

Structural headwinds for the hedge fund sector included a tendency for funds to manage enterprise risk rather than investment risk, the report said.

“As the industry has matured, we believe managers have become more concerned about jittery investors redeeming due to poor short-term performance,” Willis Towers Watson stated.

This has led providers focus on the stability of base management fee revenues rather than delivering against performance objectives for clients.

The consultancy also cited the rise of alternative beta strategies, which have allowed asset owners to replicate some hedge fund strategies at a much lower cost. Hedge funds as a whole were not giving enough value for money, it added.

In addition, the macro environment has not favoured hedge funds, according to the report, as loose monetary policy and other central bank activity has dampened dispersion and volatility.