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Institutional Investment in Hedge Funds: Evolving Investor Portfolio Construction Drives Product Convergence
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Asset Managers Also Cross the Line Into
Alternative Product
Just as hedge funds cited several reasons to cross the line into
the regulated fund space, many traditional asset managers
also brought forward arguments as to why they, too, should
cross the line, but in the opposite direction, by beginning to
offer hedge funds.
Foremost among these reasons was a desire to preserve their
asset base as well. As discussed in the investor section of this
report, there has been a massive movement out of actively
managed long-only funds into hedge funds over the past
decade. Many asset managers expressed their belief that they
needed to be able to offer a range of products that provided
an investor choices about the investment techniques that
could be employed to generate returns within their portfolio.
Moving into the hedge fund space allowed these managers to
offer a product able to employ more aggressive techniques
with fewer restraints in order to pursue alpha.
Source: Citi Prime Finance
Chart 25: Investment Structures in the Public Markets: 2012
Changes in Traditional Asset Manager Profile
LIQUIDITY
LOW
HIGH
TRANSPARENCY
HIGH
LOW
Regulated Funds
Private Funds
Chart 33
Long
Only
Passive Index &
ETF Funds
Directional
Non-Distressed
Absolute Return
Distressed
Macro
Unconstrained
Long
UCITS &
Regulated
Alternative
Funds
Convergence
Hedge Funds
Traditional Asset Managers
“ Hedge funds are more readily creating UCITS funds,
especially in equity long/short strategies. The perceived
investor appetite is leading managers to ‘UCITize what is
UCITizable’. Increased requirement for more transparency
and regulation is driving this trend. It is leading to less fees
and more compliant products. 50% of equity long/short
managers have done it or are thinking about offering these
products because they need to attract assets. US hedge
funds are also thinking about creating UCITS vehicles if they
want to raise money in Europe,”
– European Fund of Funds
“ We’re being asked by some clients to find hedge funds
to replace managers in their active equity allocation or
evaluate them as part of their credit allocation. This is
especially true when they are looking to access managers
in regions where they can’t perform their own due
diligence or in strategies that they aren’t familiar with,”
– Institutional Fund of Fund