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Institutional Investment in Hedge Funds: Evolving Investor Portfolio Construction Drives Product Convergence
Methodology
Role of Intermediaries Evolves and Offers Hedge
Funds an Advisory Partner
Institutional investors, particularly pension funds, are heavily
reliant on intermediaries in determining their hedge fund
allocations. The role of these intermediaries has shifted,
however, in recent years, and marketing teams are now
utilizing these relationships in different ways to promote their
fund and raise assets.
Chart 34 illustrates the role of intermediaries in the market
prior to the 2008 GFC. As shown, there was a clear separation
evident between FoHFs and consultants. FoHFs were primarily
used to obtain access to hedge fund managers. The quality of
their access was based on their ability to perform due diligence
and evaluate managers, and they required that investors turn
over trading authority of their capital by investing in a co-
mingled fund, where the FoHF manager was able to flexibly
shift assets in line with their evolving perception of market
opportunity and capacity. Consultants, on the other hand,
were almost exclusively focused on providing advice to
institutional investors, and though some offered operational
due diligence services, this was a little utilized capability.
As we have already discussed, there was a decisive shift in
institutional behavior with regards to FoHFs post-2008, and a
far larger share of these investors began to directly allocate
their hedge fund capital rather than turn their money over
to a FoHF to invest on their behalf. This change resulted in
a substantial realignment of the intermediary space. This
change is illustrated in Chart 35.
Fund of Hedge Funds
Consultants
ADVICE
TRADING
AUTHORITY
ACCESS
DUE DILIGENCE &
ADMINISTRATION
CHART 42
Chart 34: Role of Intermediaries in the
Hedge Fund Industry Pre-2008
Source: Citi Prime Finance
Fund
of Hedge
Funds
Consultants
ADVICE
TRADING
AUTHORITY
ACCESS
DUE DILIGENCE &
ADMINISTRATION
CHART 43
Managed
Account
Platform
Chart 35: Role of Intermediaries in the
Hedge Fund Industry Since 2009
Source: Citi Prime Finance