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Institutional Investment in Hedge Funds: Evolving Investor Portfolio Construction Drives Product Convergence
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“ We developed an alternative mutual fund of fund product
that’s registered. We’re working to get on some 401(k)
RIA platforms. We’re definitely seeing more interest from
alternative managers to create regulated 40 Act structures.
We do monitoring of the portfolios in the regulated fund of
fund and are a hedge fund sub-advisor. The underlying funds
have flat fees from 60 basis points to 100 flat. They can’t use
more than 1/3 a turn on investments that existed in 1940, but
this covers most instruments,”
– Alternatives-Focused Consultant
“ Over the past couple years we have been approached by
several institutional investors to create long-only and UCITS
product. Over the past 2 years we have been asked probably
5-10 times for RIC product alone,”
– $5-$10 Billion AUM Hedge Fund
“ If UCITS doesn’t constrain the manager, it’s more attractive
because of the liquidity and the fact that they’re regulated.
If they’re trying to shoe horn in a strategy and it really doesn’t
fit well, we’d rather go into the offshore fund,”
– Insurance Company
“ We don’t see the appeal of the regulated hedge funds.
You still pay almost all the fees in the 40 Act product. Total
all-in fees are very high and the portfolios that managers are
delivering are not the same as in their hedge funds. Instead
of a best ideas portfolio, it’s almost a worst ideas portfolio.
The manager is always going to think of their hedge fund first.
The 40 Act funds are just a throwaway,”
– $1-$5 Billion AUM Hedge Fund
These figures represent the total amount of pension fund
and retirement fund holdings across equities, bonds, and
alternatives, including assets held in institutional portfolios and
in individual accounts. Since the vast majority of retail investors
are prohibited from holding alternative investments in their
pension and retirement plans, we have excluded alternatives
from this analysis and assigned that AUM to the institutional
audience. eVestment HFN has also provided an estimate on the
size of institutional holdings in equity and bond funds globally.
These totals were $10.6 trillion in 2006 and $12.5 trillion in 2011.
We have extrapolated those figures as well, based on our view
that both alternative and hedge fund assets are set to grow in
the coming years, and projected this asset pool at $14.3 trillion
by 2016.
When alternative and institutional allocations are excluded
from the total pension fund figures, the remaining assets can
be assumed to belong to individual investors. In 2006, that
total amounted to $9.4 trillion, and by 2011 the figure had
risen to $10.5 trillion, a gain of only 11.7% versus 17.9% growth
in institutional assets and 43.0% growth in alternative assets
over the corresponding period. These figures confirm hedge
fund industry perceptions that individual investors are likely
to be looking for more active management product that could
offer higher returns.
Between now and 2016, our forecast shows that individually
held assets in pension or retirement accounts are due to
rise to $12.4 trillion. If only 10% of that pool gets diverted to
hedge fund managers looking to enter the market with long-
only product, that could represent an AUM opportunity of
$1.24 trillion. Even at a fee of only 50 basis points, this could
represent a management fee opportunity of $6.2 billion for
hedge fund managers looking to enter this space.
“ We definitely have a different fee scale for our long only stuff.
Our typical fee there is 50 basis points. We’re competing in
that space with traditional long-only managers,”
– $5-$10 Billion Hedge Fund
“ We are not looking at any registered alternative products,
but we have launched a long-only fund. This was investor
driven and existing investors told us they liked performance
on the long side of the portfolio. This is where you do get
into convergence, but this was on the high net worth side.
This is a co-mingled product,”
– $1-$5 Billion Hedge Fund