One of the most influential business strategy ideas has been the concept of disruptive innovation as described by Clayton Christensen of the Harvard Business School. Innovation can be disruptive to the status quo or incumbent business through introducing new tools, products, and approaches to business that open new markets and cut profits of existing business. By serving new customers or special customer segments, the entrant is able to disrupt the market for an existing product or by creating a new product. The money management and hedge fund business are not immune to the effects of disruptive innovation. It just may not be associated with the investment process.
The liquid alternative funds could be considered a disruptive innovation that is changing the hedge fund industry. It is a clear change in the way hedge funds are marketed and it is very disruptive to the established hedge funds, but it may need to be placed in context within the asset management industry. The disruption may is from new entrants but not small players. This disruption is from the larger asset management companies.
Hedge funds could not be easily accessed by the mass market. You had to be a qualified investor. There were tax considerations. There is a lack of liquidity with traditional hedge funds. The marketing was to high net worth individuals and institutions. The majority of market participants did not have access to the skills associated with hedge funds and the offerings available to the mass market were limited and expensive.
With the change in regulations which allowed for liquid alternative, there has been a fundamental shift in the business. Hedge funds are now being mass marketed in small pieces to every investor. The advantage of small hedge firms has been eroded and the large money management firms which have access to RIA's and brokers can be able to use their marketing and distribution forces to sell hedge funds. The balance of power has shifted from management skills to marketing skills. The amount of scale necessary for running hedge funds has increased because management fees are declining. Small firms that cannot cater to the mass market will be shut out of the process. The dominance of the boutique firm is eroding. This is a minimal technological change but it has created a new market.
The management of assets by hedge funds that cater to the liquid alt area is focused on diversification and with style betas. It is less about the alpha skill of the manager. Managing large pools of assets may be less about creating alpha because the flows are just too large. The innovation in liquid alts has not been a change in the type of returns generated. In fact, the liquid alt have not performed well. It is about the delivery mechanism. It is a well defined problem with a solution.
The impact is significant even though the technological progress is small. It is disruptive.
From Experiencinginformation.com
This disruptive innovation will cause all hedge funds to adapt. Do you mass market or become a niche player? How do you market? What terms will you give customers? The change in hedge funds will not be about investment strategy but market distribution.
1 comment:
very interesting article and very interesting thoughts. is there anyway for me to give you a call and discuss about it further? im very intrigued.
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