What is on decision makers’ minds as they prepare for 2024? Three major issues:
- Our new era of regulatory scrutiny.
- Major shifts in counterparty and third-party management.
- The new launch landscape.
Each of these has a distinct, but material, impact on the state of the alts business.
First, regulation. One group that has not had a sleepy summer? The SEC. On August 23rd, it passed new rules requiring registered investment advisers to – among other things – release standardized quarterly statements reflecting fees, expenses, compensation and performance. In the final rule – the phrase “simple and clear” appears over 15 times! There are many facets of this rule, and funds clearly need to engage with counsel to properly understand it. But at a high level, managers of all shapes and sizes should be bracing for potentially heightened expectations around calculations, transparency and reporting. Many anticipate industry groups expect court challenges, which could delay it from going into effect. But this is an issue that’s being watched intensely across the industry, given the changes it would augur and new resources it would require.
Second – all eyes on counterparty management. After years of counterparty optimization, 2023 was the year of counterparty risk in the wake of the SVB and FTX collapses. Managers have been spending considerable time tire kicking the solidity of their counterparties, and in some cases, have instituted new due diligence policies and procedures to satisfy investors. While bank risks seem to have abated – at least for the time being – this year served as a reminder that ongoing diligence and engagement with counterparties is necessary, especially when there are material shifts in the broader global economy…like the strong move into quantitative tightening.
Finally – the new launch landscape and what it takes to get a fund off the ground in mid 2020s. The environment is so different than it was a decade ago when we saw more than 1,000 funds launched each year from 2011 – 2014. Last year, there were only 432 new fund launches and more than 570 closures. What is accounting for this decline?
1) The strength and value proposition of going to a large multi-manager platform. These days you need to really need to want your name on the door to build technology, infrastructure and a team from scratch, all while asset raising and managing a portfolio.
2) The costs of launching are higher than ever before as management fees have declined. Some of this can be offset by the explosion in outsourcing solutions but startup capital for the runway needed to launch is considerable.
3) The volatility of markets (though it has come down), and the uncertainty around further Fed easing and other macro events has some thinking the future may offer a more welcoming environment for their strategies.
The one silver lining? There are still billion dollar launches expected in 2024, and in the first half of this year – hedge funds welcomed $12 billion, with ~20% of that going to emerging managers.
There are so many things out of managers’ control – the macro landscape, intraday volatility, and asset flows. But the regulatory environment, counterparty management and the new launch landscape are three things that can be effectively managed.