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Institutional Investment in Hedge Funds: Evolving Investor Portfolio Construction Drives Product Convergence
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market conditions, and their macro view on how the overall
investing environment is likely to impact the various risks
being tracked in the portfolio. This is especially true of
organizations that choose to move beyond risk budgeting to
an actual risk parity approach.
Paying an external firm to handle that type of active
portfolio oversight is seen as more affordable by many in the
institutional investing community, since they will be sharing
the compensation of their outsourced CIO across many other
investors instead of looking to pay an individual or team to
perform that function internally.
Intermediaries Help Connect Hedge Fund Managers
to Long-Only Allocators
There is, finally, one other factor to consider in understanding
the role of intermediaries and how they can benefit the hedge
fund in looking to market their capabilities. This has to do with
the ability to leverage these relationships to forge more direct
contacts with the long-only allocators at many institutional
investor organizations.
As noted at the end of Section VI, there is potentially a $2
trillion opportunity for hedge fund managers willing to
extend their offerings from their core hedge fund product
to vehicles that could qualify for other asset pools in the
convergence zone. Asset managers have a natural advantage
in positioning for these allocations because of their extensive
set of relationships and their broad distribution and
marketing teams. Hedge funds have for the most part only
opportunistically taken advantage of the space via requests
from existing or prospective clients or through one-off
introductions from their intermediaries.
The appetite exists for better connectivity. As noted several
times in this report, there are already many anecdotal
instances where a long-only allocator at an institution is
looking to expand its knowledge of hedge fund managers.
Securing these managers to oversee money shifting from
traditional benchmarked to unconstrained long strategies is
seen as highly attractive, but there is a definite relationship
gap that needs to be filled in order for this to become a more
viable outcome.
The emergence of outsourced CIOs, the expansion of long-
only consultants to include alternative units, and the shift
in fund of fund focus toward constructing more customized
portfolios all present the hedge fund marketing team with
an opportunity to create a proactive plan to build out their
network of contacts and begin testing the waters in terms of
expanding their product portfolio.
“ There’s been a real trend toward people wanting professional
management of their portfolios, particularly after 2008
and the problems people saw with their liquidity that were
entirely unexpected,”
– Outsourced CIO
“ We don’t consult. We construct a portfolio and our clients
allocate their capital to us and we invest it for them. It’s
about structuring, not advising,”
– Outsourced CIO
“ I really believe in the outsourced CIO trend. It makes
enormous sense for a large number of allocators, especially
those that don’t have the money to build their internal
expertise. Groups that choose to go their own route are
typically layering in additional fees through consultants or
fund of funds and they end up underperforming. With an
outsourced CIO, you’re sharing your costs with a lot of other
investors that are in similar situations. You’re syndicating
your costs and direct skill-based expertise,”
– >$10 Billion AUM Hedge Fund
“ If you’re working only with a client’s hedge fund bucket you
are working with one eye closed and you’re really missing
the bigger picture. So when we work with a client’s hedge
fund allocations we like to model that out against the client’s
total portfolio.”
– Consultant & Fund of Fund
“ Our marketing is focused primarily on hedge fund sales but
looks opportunistically at the long-only business,”
– $1-$5 Billion AUM Hedge Fund
“ Sometimes our clients are interested in understanding what
we’re invested in. For one investor, we do an investment
committee meeting every month. He likes to get an
overview of the trends of the market and the activity of the
underlying managers. They use this information to evaluate
their overall portfolio, not just the portion we manage,”
– European Fund of Fund