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Institutional Investment in Hedge Funds: Evolving Investor Portfolio Construction Drives Product Convergence
“ We moved into the long-only space at the request of one of
our hedge fund pension fund investors looking for more of a
pure alpha play,”
– $1-$5 Billion AUM Hedge Fund
“ Our entry into the long-only space came via a reverse inquiry
from an existing hedge fund client. They wanted us to
provide them with a long-only fund investing in convertible
bonds which is one of our areas of expertise,”
– $1-$5 Billion AUM Hedge Fund
Yet, for many years these strategies were able to successfully
draw away money from actively managed long-only funds as
investors competed for access to some of what they perceived
to be the best stock pickers in the industry. This is illustrated
in Chart 30.
Between 2003 and 2007, directional hedge fund managers
gained market share at a rapid clip. When compared to the
total universe of actively managed institutional AUM (total
AUM less allocations to passive index & ETF funds), directional
hedge funds’ share of assets rose from 5.9% to 10.9% in this
period. This represented a belief across the institutional
audience that these managers offered superior alpha-
generating potential compared to those managers overseeing
their traditional actively managed portfolios.
Many institutional investors and their intermediaries continue
to view the skill of these managers positively. In contrast to
the concerns they cited about long-only portfolio managers
trying to shift into the long/short skill set, the majority of
survey participants saw these long/short managers as better
suited to move in the opposite direction.
Managers in the directional hedge fund grouping can show
proven track records on the long side of their book, and since
they were running fairly substantial net long portfolios many
of them were seen as more fundamental in their approach and
thus well positioned to identify and capture value on the long
side. Indeed, a significant majority of respondents indicated
that they would prefer to have these managers handle their
long-only allocations if at all possible; many alternatives
consultants and direct hedge fund allocators mentioned that
they are being approached by representatives handling the
long side of investor portfolios to help them identify directional
hedge fund managers for new long only allocations.
We have tried to model what the impact of this trend might
be in terms of total AUM. If we extrapolate the share that
directional hedge fund managers represent across the total
actively managed universe using the entire 2003-2011 period,
which includes the slow growth of recent years, we project a
gradual increase in the share from 9.6% at the end of 2011 to
a new record of 11.9% by 2016.
.
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
F F F F F
5.9%
10.9%
9.6%
11.9%
15.8%
$9,206 B
$12,268 B
$11,528B
+$450B
Chart 38
Based on Average
Directional
Hedge Fund
Flows
Based on Hedge Funds
Picking Up Active
Long Only Flows
2003
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
4%
6%
8%
10%
12%
14%
16%
Chart 30: Actively Managed Institutional & Directional Hedge Fund Assets
Vs. Directional Hedge Fund Share—Actual & Projected