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Institutional Investment in Hedge Funds: Evolving Investor Portfolio Construction Drives Product Convergence
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Section VII: Accessing Investors Requires More Nuance
and Interaction With Intermediaries
Leading Hedge Funds Move toward a “Know Your
Investor” Approach to Marketing
As has been discussed throughout this paper, the hedge fund
landscape and investor base has changed over the past few
decades, growing from a cottage industry known primarily to
a high net worth and family office audience to an investment
option for the largest and most sophisticated institutional
allocators globally. Long gone are the days when the primary
marketing tool hedge fund managers relied upon to attract
new capital was word-of-mouth endorsements at cocktail
parties and family gatherings.
Hedge funds have improved many aspects of their business to
attract institutional investors including their use of technology,
the strengthening of their operational infrastructure, and the
formalization of their policies and procedures. Being able
to articulate these enhancements became a critical part of
a manager’s presentation to investors post Global Financial
Crisis. Discussing your fund’s operational excellence is now
considered a basic part of every manager’s marketing story,
right alongside their CIO’s and investment team’s pedigree,
philosophy, and track record.
Institutions are becoming more experienced hedge fund investors and now use three different portfolio
configurations to administer allocations, each of which positions hedge funds somewhat differently in terms of
where managers compete for flows and how their strategy is expected to impact the investor’s holdings. Knowing
how to present their fund to most effectively address each type of portfolio configuration is becoming a key
requirement for hedge fund marketing teams. Managers can leverage an expanding set of intermediaries focused
on advising investors to help gain a deeper understanding of the investor’s goals. These same intermediaries also
offer a conduit for hedge funds looking to forge stronger ties to allocators in the long-only space.
Chart 41
Passive
Active Long Only
Directional Hedge Funds
Corporate Private Equity
Macro Funds
Commodities
Volatility & Tail Risk Funds
Absolute
Return
Market Neutral Funds
Arbitrage Related Strategies
Relative Value Strategies
Real Assets
Infrastructure
Real Estate
Other (i.e., Timber)
Inflation/
Stable Value
Product Positioning
Product Positioning
Product Positioning
Passive
Active
Passive
Active
No Fixed Allocation
Discretionary Investment in
Hedge Funds, Private Equity,
Infrastructure or
Commodities
Opportunistic
Passive
Active
Passive
Active
Hedge Funds
Private Equity
Infrastructure & Real Assets
Alternatives
Equity
Risk
Equity
Bonds/
Fixed
Income
Equity
Bonds/
Fixed
Income
Source: Citi Prime Finance
Chart 33: “Know Your Investor” Aligned-Marketing Messages