Hedge fund managers in Europe need to focus on building closer partnerships with investors by providing additional services, according to the latest issue of The Cerulli Edge – Global Edition, which is published by consultancy Cerulli Associates.

The firm claimed that hedge fund managers have institutionalised their offerings in the past decade, however, there is an increased need to establish “strong ties with investors”, its research found.

More than half (58%) of the managers Cerulli surveyed said that focusing on partnerships will be a very important priority over the next 24 months when distributing their hedge fund strategies.

Justina Deveikyte, director in Cerulli’s European institutional research team, said: “Although providing additional services will be challenging for smaller managers, mid-sized and larger managers should aim to build holistic partnerships with their clients; this can improve investor retention even during downturns in performance.”

Such partnerships typically feature reporting capabilities, exposure to investment teams, and digital content.

ESG and responsible investing

Although transparency has improved, managers will need to make further progress as investors demand more position-level exposure data, including ESG metrics at the security and fund levels, the firm stated.

Cerulli’s research also disclosed that European investor interest in hedge funds is set to increase. However, to create fundraising opportunities, managers will need to increase their competence in responsible investing, improve their client servicing, and focus their product development initiatives on unique and capacity-constrained propositions, it said.

The firm said that sustainability-oriented hedge funds, including liquid alternatives, are expected to become more dominant in the market as institutional investors expand their responsible investment policies to cover their whole portfolios.

The survey found that 73% of hedge fund manager respondents prioritise adding ESG considerations into their investment process.

However, the assets under management (AUM) of dedicated ESG liquid alternative funds remain low, representing only 2% of total industry AUM. Nearly two-thirds (60%) of the hedge fund managers Cerulli surveyed see the incorporation of ESG factors as a competitive advantage.

Deveikyte said that growth in this area is expected particularly with “managers’ negative screening approaches to gain most traction.”

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