Alternative investment management: The boutique advantage

When it comes to alternative investment management, boutique continues to be a magic word. As in any business, investors are looking for firms that will give them strong performance and boutique firms offer such an advantage. While bigger firms have the advantage in distribution and compliance due to economies of scale, these advantages do not translate to wins for the investors. In fact, recent top performers are managers with smaller assets under their management.

Most boutique investment managers are passionate about investing and have years of experience as many come from larger and more traditional firms before setting up their own. The same people who have the power to make investment decisions often own these firms.  These principals have more at stake in the fund they offer because their own money is also invested. The managers themselves have a concern in the success of the portfolios they manage. Thus, it is a safe to say that the interests of these managers and the investors are aligned. Many traditional investment managers from bigger firms do not invest in their own firm’s offerings. Without personal interest at stake, they may tend to be more complacent when responding to changes in the market environments.

Many of these boutique managers also have very good return records. Recent trends show that many boutique investment managers fare better than those from bigger firms. Bigger assets under management often translate to a more difficult time making effective investment decisions.

Another reason for this is the disciplined investment process they have developed and cultivated. The investment decisions in boutique firms are based on independent and high-quality research and have undergone well-defined processes to ensure risk-adjusted performance.

Because boutique firms operate lean and have very few staff, the working environment fosters a more entrepreneurial approach and encourages ownership structure. This leads to better retention of high-performers.

Boutique firms are also preferring to focus on and master specific areas instead of having a wide array of offerings. By doing this, they establish expertise in specific fields. They also reduce risk to investments by staying in focus and moving away from sectors that are not in their wheelhouse or those where they cannot compete effectively.

Like most alternative investment management companies, boutique firms come in different shapes and packages. But they are most likely to succeed when they tap asset servicing firms to promote cost-efficiency in operations, and complement their resources with expertise in back and middle office functions.