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This trend has had a significant impact on trading
activities. A growing percentage of the industry’s
AUM is being managed by investment professionals
that employ sophisticated trading techniques such as
increased reliance on shorting and either hedging or
obtaining synthetic exposure via derivatives (swaps,
options and futures). This is the new “demand” reality
that asset owners must consider in determining
the best use of their supply. Moreover, new players
such as hedge funds and private equity firms are
becoming long assets owners and thus considering
additional options for obtaining the maximum value
of this supply.
Parts I & II of this year’s survey, Opportunities and
Challenges for Hedge Funds in the Coming Era of
Optimization, delve extensively into the demand side
of this equation. This report will now focus on how
these changes are driving a need for asset owners to
be more strategic in their thinking about the optimal
use of their supply. To set the stage, we will first
revisit our convergence argument to illustrate how a
changing industry structure is creating more pressure
and more opportunities for asset owners
Introduction: Convergence & Growing Demand
for Alternatives
Whereas there used to be distinct divisions between the types of investment funds being offered
and the category of manager overseeing those offerings, the trend in recent years has been
toward each type of investment manager—asset managers, hedge funds and private equity
firms—to offer an increasingly overlapping and indistinguishable set of products. There are
now a whole set of strategies that exist in a “convergence” zone and that are being offered by
multiple types of firms.
Liquidity
High
High
Transparency
Private Funds
Hedge Funds
Traditional Asset Managers
Regulated Funds
Low
Low
Passive Index
& ETF Funds
Equity Hedge &
Event-Driven
Relative Value
Distressed
Macro
Actively Managed
Long-Only Funds
Source: Citi Investor Services
Barbell
Chart 1: Investment Structures in the Public Markets: 2002