The Rise of the Investment Boutique

Terry Flanagan

A greater number of institutional investors are seek nontraditional sources of alpha, leading to a two-tiered marketplace, with large multiservice asset managers controlling the lion’s share of activity, and the remainder going to niche players, including independent boutiques.

Being owner-operated ranks among the top drivers of success within the boutique fund industry, but nearly half of respondents (49%) attribute the rise in boutiques in part to a reaction against large funds, according to the SunGard Asset Arena 360 Boutique Asset Manager survey.

Some 70% of the SunGard survey respondents believe that an “hourglass” or “Big Squeeze” phenomenon—in which middle-market players are increasingly marginalized—will likely continue to re-shape the marketplace.

Larger players enjoy economies of scale, while smaller asset managers are profitable on fewer assets than larger firms as they offer more unique products and can therefore charge higher fees, said 60% of respondents.

For those looking to set up shop, cost of operations, regulation, the burden of due diligence and compliance, the ability to show institutional grade control systems and IT investment are the top five barriers to entry.

Of greatest importance to boutiques are the U.S. Foreign Account Tax Compliance Act (Fatca), the U.K.’s Retail Distribution Review (RDR), Europe’s Alternative Investment Fund Managers Directive (AIFD), and the U.S. Dodd-Frank Act.

“It is important not to forget that there are no revenue benefits for asset managers involved here,” said Matt Grinnell, compliance officer, buy side at Fidessa.

“They are being required to go through a significant compliance loop with all the attendant costs and upheavals in order to do precisely the same business they have always done,” he said. “It’s another case of the majority, who operate in a low-risk environment, being forced to pay the price for the tiny minority of high-risk players.”

Boutiques have a clear view of the factors that could make or break their enterprises in the next year, and have identified investor confidence, investment returns, rising costs, risk transparency and the Eurozone crisis as the top five factors on their watch lists.

“Owner-managers need real-time information at their fingertips concerning their clients, portfolios, trades in progress, risks and compliance issues, with a single point of truth and a full audit trail,” said Paul Compton, SunGard’s head of strategy for asset management, in a statement. “To win new business and service ‘continuous due diligence’ demands, they need to be able to demonstrate the integrity of their processes to potential investors.”

SunGard’s Asset Arena 360, said Compton, provides “a single integrated platform for all these functions, hosted and managed by SunGard to help keep the internal costs of owning and operating technology to a minimum.”

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