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16
I
Institutional Investment in Hedge Funds: Evolving Investor Portfolio Construction Drives Product Convergence
Better Transparency and Investors’ Desire to See
Total Securities Exposure Drives Change
A shift in how investors’ internal teams communicate is
helping to drive this change. There is more discussion
starting about what assets are being held in traditional equity
and/or credit portfolios, and the extent to which those assets
overlap with directional hedge fund holdings. For many years,
the teams charged with administering these two areas of
institutional investor portfolios operated in separate spheres.
There was very little communication across groups and for
the alternatives focused allocators, there was also very little
transparency into hedge fund holdings.
This began to change after the global financial crisis. Hedge
fund managers have become much more transparent about
their positions and exposures, as will be discussed further in
Section IV. This has created an improved flow of information,
and in many instances hedge funds are now willing to send
data on their holdings directly to investors via either reports
or risk aggregation engines. This has made it easier for the
alternatives team to share information with the broader
investment team.
As the flow of information about hedge fund holdings has
improved, there has also been an emerging sense that
administering their hedge fund holdings separately from
their core positions is creating exposures that the investor
is unaware of and thus not managing properly. This view is
being fed by many in the traditional consulting community
that have recently expanded their practices to include groups
focused on alternative investments.
DIRECTIONALITY
LOW
HIGH
Chart 15
Directional
Macro
Absolute Return
Long/
Short
Event
Driven
Macro
& CTA
Distressed
Relative
Value
Arbitrage
Market
Neutral
Volatility
& Tail Risk
Active
Equity &
Credit Long
Only
Passive
Corporate
Private Equity
Equity Risk
Actively
Managed
Rates
Commodities
Infrastructure
Real Estate
Timber
LIQUIDITY
HIGHLY LIQUID
ILLIQUID
Public Markets
Private Markets
Stable Value /
Inflation Risk
Chart 7: Grouping of Investment Products By Equity Risk
“ For us, private equity would live within our equity allocation.
Long/short strategies would live within equities. It’s the
driver of returns. What are you buying and how do you
crystallize that purchase? We’re starting to see our clients
come around to this point of view.”
– Long-Only and Alternatives Consultant
Source: Citi Prime Finance