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Institutional Investment in Hedge Funds: Evolving Investor Portfolio Construction Drives Product Convergence
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What that might equate to in total AUM is difficult to project
because this would require a point of view on where the size of
the total actively managed universe is headed, and there has
been too much volatility in this figure over the past 5 years
to reliably forecast. At 2011 asset levels, however, a pick-up
of 2.3% would equate to an AUM gain of $265 billion over the
next 5 years. This figure represents our baseline projection
for the directional hedge fund manager category.
To determine how much AUM might be available to these
managers on the long-only side as opposed to in their
directional hedge fund portfolios, we have extrapolated likely
shifts in market share based on the faster pace of growth seen
prior to 2008.
Our reasoning is that institutional investors originally diverted
funds from their traditional long-only managers to hedge fund
managers because they believed that hedge fund managers
were more apt to produce alpha. This assessment still seems
to hold true, but they are now looking for these managers to
handle their allocations via long-only exposures as opposed to
hedged exposures.
In this scenario, directional hedge fund managers might be
projected to increase their market share more substantially,
from 9.6% to 15.8% of the total universe. Again using the 2011
level of assets, this 6.2% gain would represent a $715 billion
gain in AUM.
This $450 billion difference between the baseline projection
for directional hedge funds and what a renewed acceleration
in growth based on performance prior to 2008 would
have indicated is the size of the asset pool we project that
directional hedge fund managers could pick up in terms of
custom long only portfolios from existing and prospective
institutional investors.
Regulated Alternative 40 Act and UCITS Funds
Show Rapid Growth in AUM
Hedge fund managers looking for expanded opportunities
in their core alternative strategies and interested in tapping
into new investment audiences are watching developments in
regulated alternative products and considering opportunities
in that sphere. In their report Regulated Alternative Funds:
The New Conventional, SEI Knowledge Partnership (SEI) and
Strategic Insight note that AUM for these types of products
reached $644 billion as of 2011, up 134% since 2006. This
dynamic growth is illustrated in Chart 31.
SEI notes that these offerings represent the ultimate
convergence product. They allow retail investors and their
advisors access to the greater complexity and diversity of
alternative strategies that were previously reserved solely for
qualified high net worth and institutional audiences. They also
offer institutional and high net worth investors a regulated,
transparent, and liquid structure that is usually found only in
the retail domain.
“ Many investors feel that it makes sense to have a manager
that has gone through multiple cycles showing their ability
to create alpha on the short side evolve his approach to run
long only as well. This makes much more sense than having
a long-only guy change his DNA,”
– < $1 Billion AUM Hedge Fund
“ The director of our long-only program is doing some new
sourcing for her portfolio and she’s coming to us on the
hedge fund side asking which hedge fund manager’s process
might be well-suited to long only,”
– US Public Pension
Alternative UCITS Funds
US Alternative Mutual Funds/ETFs
2009 2010 2011
2005 2006 2007 2008
100
200
300
400
500
600
700
$644
+134%
$275
Chart 39
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Chart 31: Assets in Alternative UCITS & Mutual
Fund/ETFs
Source: SEI Knowledge Partnership, Strategic Insight Simfund GL, MF