There is growing competition with how investors access returns for different investment strategies. For example, hedge funds have developed multi-strategy approaches to investing. The multi-strategy approach has replaced fund of funds as a good means for accessing diversified hedge fund return exposures. On the other hand, there are the bundled offerings of alternative risk premia through banks who are now effectively competing in the multi-strategy hedge fund space.
Investors are on a quest to find cheaper return generation and more customized bundling of strategies. Financial firms are on a constantly trying to offer new products to capture and retain assets. Structural changes is the result of this competition and the creative destruction surrounding the money management industry.
Money managers and banks have responded to the changing view of how returns are generated and decomposed in markets. The philosophical focus has shifted from asset class or simple alpha and market beta descriptions to more sophisticated decompositions of returns like factor or risk premia. The premise is that quantitative analysis can decompose risks more effectively than a simple classification based on asset classes. The deeper decomposition of risk will lead to better understanding and management of the return generation process.
The developments in alternative risk premia (ARP) swap products from banks are their attempt to better compete in the quantitative management space and provide alternatives to multi-strategy funds. ARP products combine quantitative skill, indexing, passive investing, and risk premia work. We think that bank swap competition will result in even further pressure on asset and hedge fund managers. The process of creative destruction will continue.