GLOBAL - Emergence of 'new style' alternative investments is forcing long-only managers to "mimic" them and will ultimately reduce long-term potential returns on assets, claims a study released today.
Findings of a report published by consultancy giant KPMG and Create Research suggest increasing competition in the investment markets from hedge fund and private equity managers has led to a convergence in investment strategies, despite promises of uncorrelated returns, which will eventually reduce the returns all managers can potentially deliver.
More specifically, said Amin Rajan, chief executive of Create and the main author of the report, entitled Convergence and divergence: new forces shaping the investment universe, long-only managers have been forced to respond by "offering products that mimic the returns offered by their new competitors", however, as the pace of convergence slows, so too will those eventual returns.
"As a result, their respective returns are converging, as are their back office infrastructures. The ensuing competition is driving out mediocrity, squeezing the margins and institutionalising the alternatives," said Rajan.
According to the survey of 310 fund managers and pension funds, with combined assets of $28trn (€19.4trn), the actual convergence is far from uniform but indications are it will slow down on the long-only sector and if alternatives are to "retain their dizzy growth of the recent past, suggests the report, they will need to deliver absolute uncorrelated returns and deliver a new generation of "customised structured finance products with capital protection and full transparency".
Moreover, increasing diversification of monies into wider asset classes and strategies will eventually lead to a blurring of the boundaries between asset classes as investors seek to separate returns generated by market movements and those delivered by manager skill.
A combination of convergence and the current prospect of a bear market "will help to accelerate the pace of industry-wide M&As", driven by larger players inside and outside their core areas of expertise, the report concluded.
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