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Institutional Investment in Hedge Funds: Evolving Investor Portfolio Construction Drives Product Convergence
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Source: Citi Prime Finance
New funds also benefit from robust trade, as well as position
monitoring and risk oversight. Large asset managers have
industrial-strength systems that process hundreds of funds
daily and large teams already in place to supervise portfolios.
This is very appealing to the eventual external clients, who
perceiveoperational excellence and independent risk oversight
as important facets of their investment decision. There is also
a cost benefit for the hedge fund as the portfolio manager is
typically charged only incremental costs, with support charges
dispersed across a much wider set of participants.
Hedge funds within asset managers also benefit from research
and commission relationships that are core to the long-only
businesses. These asset management firms have significant
sell-side relationships with access to premiere research ideas,
investment insights, and corporate introductions. Asset
managers also use the weight of their total wallet across a sell-
side firm to negotiate the most favorable commission rates.
Portfolio managers running hedge funds within asset manager
organizations benefit from this broader relationship, allowing
them access at a level far superior to most comparably sized
hedge funds operating independently. Investors recognize
this advantage in reviewing such managers.
Finally, the hedge fund benefits from the asset manager’s
extensive distribution network and partnerships. Such
organizations invest vast sums in building out robust
relationship management teams that often focus on high
net worth and institutional audiences. These relationships
provide ready ground for introducing and attracting assets to
new funds when they are ready for launch.
Although the majority of these organizations focus on long-
only sales, they are increasingly creating product specialists
that can work with relationship managers to help promote
hedge funds. This removes the responsibility for capital
raising from the portfolio manager and investment team,
allowing that team to focus exclusively on the portfolio.
This ability to identify and successfully execute a short trade
idea was one of the most debated and discussed points
in the survey.
Chart 34
Proposal of
Investment
Thesis
Give Up Long
Only Portfolios
Paper Trading
of Strategy at
Capacity
Establish Live
Track Record
Approved
by
Investment
Committee
Decision to
Provide
Seed Stake
Open Fund
to External
Investors
6 – 12 Months
1 – 3 Years
In Some Cases
Exclusive
Focus on
Hedge
Fund
Chart 26: Asset Manager Approaches to Developing Hedge Fund Units