The increase in product diversification is seemingly more pronounced in larger, better-established businesses, as 81% of managers running more than $5bn in hedge fund assets had launched at least one non-traditional hedge fund product.
More than three-quarters, or 77%, of the respondents running a diversified suite of products have been managing non-traditional hedge fund products for more than three years, including 40% with more than a decade of experience.
Deutsche Bank said such managers with extensive resources, experience and brand loyalty were particularly well-placed to respond to growing client demand for bespoke products.
The survey, entitled ‘From Alternatives to Mainstream’ interviewed 200 investor organisations collectively responsible for $625bn and 60 global hedge fund managers representing $528bn of group assets.
More than half the respondents said they allocated to non-traditional hedge strategies, including 36% investing in hedge-run long-only funds, a third investing in liquid alternatives run by hedge fund managers.
One-third of all investors increased their allocations to non-traditional hedge fund products last year and another 43% intended to over the next 12 months.
The $2.51trn hedge fund industry has grown 12% annually over the last five years, showing a healthier recovery since the financial crisis took hold than either the US mutual fund industry, which has grown at 10% a year, or the European Ucits market, rising 3% a year over the timeframe.
Half of the manager respondents currently run non-traditional hedge fund products. Of these, 48% have seen more than half their new business since 2008 flow into this space.
The report said one-fifth of all responding managers had plans to launch at least one non-traditional hedge fund product over the next 12 months, and another 42% were considering it.
With a variety of new growth channels, Deutsche said it expected hedge funds to become a far more significant part of the wider asset management industry in future.
“While assets residing in liquid alternatives and hedge fund-run long-only products currently represent a small portion of these markets, recent growth rates in each of these arenas suggest that the gap will narrow in the coming years, and that it will be driven by hedge fund managers.”
Deutsche said the financial crisis and regulatory change were responsible for the greater appetite for liquid alternatives – largely alternative 1940 Act mutual funds and alternative Ucits products.
“Significant market losses, high correlations and unforeseen illiquidity issues have led retail investors and private wealth managers to increasingly seek liquid, non-correlated assets with lower portfolio volatility within a regulated investment framework. It is evident that they are turning to liquid alternatives as a solution,” the report said.
It revealed alternative mutual fund growth (CAGR) of 38% growth over the past five years, growing from $47bn in 2008 to $238bn by Q3 2013. While these assets represented just 2% of the US mutual fund market, this was expected to pick up in the coming years.
Elsewhere, alternative Ucits assets have increased more than 300% since the crisis to €163bn. These now account for 2.5% of the total €6.6trn Ucits sector, compared with 0.5% in 2008.
