According to a TABB Group news release, “Alternative Investments 2007: The Quest for Alpha” predicts actively-managed U.S. equity mutual funds, currently the largest segment of the mutual fund industry as measured by assets under management (AUM), will remain relatively flat at 3%, “but assets in 120/20 and 130/30 active-extension funds will explode from $140 billion in 2007 to nearly $2 trillion by 2010, a 141% CAGR (Compound Annual Growth Rate).”
“[Alpha-seeking firms] are becoming more creative, moving overseas and towards frontier markets, moving up and down the capital structure, moving toward shorter-term, event-driven strategies and longer-term holding strategies that resemble private equity-type investments. And shorting and leverage, used by the first hedge fund as early as 1949, are becoming more sophisticated and mainstream, proven by the explosion in AUM in enhanced active, enhanced long and short extension equity strategies,” said Larry Tabb, founder and CEO, TABB Group, and co-author of the study with Jeromee Johnson, according to the release.
Ninety percent of the fund managers interviewed said they believe the growth of active-extension funds will increase as the pressure for increased yield and increased fees push traditional managers into this area.
The news release said other findings of the study include:
- Nearly half of all fund managers said they believe their greatest source of new alpha will be generated by new geographic markets.
- Research continues its shift from a sell-side function to one performed by the buy side.
- By 2012, the buy side will generate 63% of its research internally, with spending on broker research declining to $3.42 billion.
- More than 50% of funds reported they would increase their spending on independent research providers, who are expected to grow their revenues from $1 billion in 2002 to $2.4 billion in 2012, a 9.15% CAGR.
- 40% of funds said they believed trading costs were the most significant cause of lost alpha.
- In aggregate, only 35% of the firms said brokers helped them capture alpha. However, size and satisfaction were linked as larger firms were overwhelmingly more satisfied by their brokers’ ability to capture alpha.
TABB Group interviewed 67 portfolio managers, chief investment officers, heads of research and senior managers of hedge funds, funds of funds and traditional long-only asset managers with a focus on traditional equity managers who had started active-extension funds.
The study can be downloaded by TABB Group Research Alliance clients at https://www.tabbgroup.com/Login.aspx . Otherwise, to request an executive summary or to purchase the report, go to http://www.tabbgroup.com/research .