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Institutional Investment in Hedge Funds: Evolving Investor Portfolio Construction Drives Product Convergence
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Source: Citi Prime Finance
Chart 24: Investment Structures in the Public Markets: 2012 Changes in Hedge Fund Profile
LIQUIDITY
LOW
HIGH
TRANSPARENCY
HIGH
LOW
Regulated Funds & Long Only SMAs
Private Funds
Chart 32
Actively
Managed
Long Only
Funds
Passive Index &
ETF Funds
Directional
Non-Distressed
Absolute Return
Distressed
Traditional Asset
Managers
Macro
UCITS &
Regulated
Alternative
Funds
Hedge Funds
Hedge Funds Cross the Line to Offer a Range of
Actively Managed Products
Narrowing the gap between hedge funds and traditional asset
management products has made it fairly easy for many hedge
funds to take that process one step further and move across
the line that separates regulated funds and long-only SMAs
from private funds.
Several factors have driven this move. First, the size of the
wallet in the regulated and long-only SMAworld is substantially
larger than hedge fund AUM; this will be explored further in
Section VI. Many managers saw opportunities to diversify
their investment base and tap into new retail capital pools
with regulated alternative or long-only product. Even if these
investments brought with them lower fee structures, sentiment
was that managers could raise large enough amounts of
AUM to equal or even exceed the higher management and
incentive fees they could have obtained on their core hedge
fund product.
Second, there was rising retail and institutional demand from
Europe for regulated UCITS funds. Consequently many of the
more liquid hedge fund managers in directional or macro
strategies saw opportunities to preserve their asset base
by launching such vehicles. In part, this was a response to
regulatory uncertainty regarding the Alternative Investment
Fund Managers Directive (AIFMD) marketing rules, and
a desire from many participants to ensure that they had
onshore product to offer their investors. In part, this was
also a backlash against the liquidity issues many investors
experienced during the GFC. Over the last 2 years, many US
and Asian managers have begun to launch, or have considered
launching UCITS to tap into European investors.
“ Transparency from hedge funds is getting better and
reporting is improving,”
– Endowment
“ If a hedge fund shows any hesitancy to being transparent,
they’re off the table in terms of our consideration,”
– US Public Pension
“ In Europe, we still see a near manic focus on liquidity. It’s
probably the biggest regional differentiation we notice,”
– < $1 Billion AUM Hedge Fund