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Institutional Investment in Hedge Funds: Evolving Investor Portfolio Construction Drives Product Convergence
I
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This marks a complete reversal of the barbell concept, where
managers were positioned prior to the GFC. The blurring of
lines between traditional asset managers and hedge funds
also reflects the shift in investor portfolio configuration toward
risk-aligned allocation buckets that combine allocations to
long-only and hedge strategies. Indeed, the convergence zone
is an alternate representation of the publicly traded portion of
the investors’ equity risk bucket ,as discussed in Section II.
The shift in product offerings from both hedge funds and
traditional asset managersmay saymore about where investor
portfolios are headed than any comment or observation from
participants trying to evaluate the likelihood of a change in
portfolio approach.
As hedge funds and traditional asset managers compete
head-to-head in their offerings, opinions on which type of
manager is better suited to handle each type of investment
are diverse. In some areas, traditional asset managers are
seen as having inherent advantages, and in other areas hedge
fund managers are seen as superior. In both instances, there
are challenges that the managers would need to overcome in
order to most effectively pursue the whole range of products.
Core decisions need to be made about how to adjust their
organizations and their client strategy in order for managers
to effectively compete in this space.
The following sections will explore such challenges and delve
into the opportunities offered via product innovation in both
the asset manager and the hedge fund space.
“ Regarding hedge fund and long-only managers, my belief is
that there will be creep but I don’t see either encroaching
on the other very quickly. And the reason is due to the
difference in business models. Investors need to say to
themselves, do I want part of my portfolio allocated to
the cottage industry of hedge funds or do I want to keep
allocations with the big boys in the mutual fund space,”
– Alternatives Consultant and Fund of Fund
“ When you look at how investors are allocating capital,
the lines between long-only equity and long/short equity
are going to blur and that’s going to benefit long/short
managers,”
– >$10 Billion AUM Hedge Fund
“ We tend to bump into the long-only guys more when we are
pushing our unconstrained global long bond funds because
this is a more similar product. We’re not seeing them as
much on the long/short side.
–$5-$10 Billion AUM Hedge Fund
“ There will be some convergence, but not as much as people
thought a while ago. There are different skill sets, and
convergence could be a disguise for mediocrity,”
– >$10 Billion AUM Hedge Fund