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Institutional Investment in Hedge Funds: Evolving Investor Portfolio Construction Drives Product Convergence
Methodology
Conclusion
Another corollary to this change in portfolio approach relates
to how different hedge fund strategies are now being viewed in
relation to other investment vehicles. Hedge funds with a high
net long or short directionality are being evaluated for how
their performance impacts traditional long-only allocations,
and even to some extent how they act in a portfolio construct
with corporate private equity and distressed securities. Macro
and volatility strategies are being viewed in parallel to interest
rate and commodity investments. This change in perspective
is opening up new product opportunities and a new mindset
in the investment community about where to source their
trading talent.
Hedge fund managers have identified an opportunity to
extend their product offerings into the long- only and
regulated fund space, where their research and trading talents
are seen as highly desirable. Asset managers have identified
an opportunity to harness their superior infrastructure
and excellence in fundamental portfolio management to
extend beyond their benchmarked long-only offerings to
a new set of unconstrained long and alternative products.
The result has been that there is now a substantial set of
investment opportunities that exist in a convergence zone,
where institutional investors have their choice of sourcing
their investment management from either traditional asset
managers or from hedge fund managers. Beyond the $1 trillion
potential we see for hedge fund strategies, we estimate that
there could be an additional $2 trillion opportunity in these
other products.
Determining the right model to pursue these opportunities
is likely to continue to drive change across the industry
in coming years. Already, a movement is beginning to hire
away talent from successful hedge fund organizations to
asset management firms. This trend is likely to accelerate
their movement into convergence products. Similarly, large
hedge fund managers are branching out and extending their
platform to offer a broader product mix that includes long-
only funds, new regulated alternative funds, and potentially
hybrid cash + alpha products that bridge the private and
public markets divide.
With the environment becoming so fluid, there has been an
increased need for both asset managers and hedge fund
managers to understand prospective and existing investors’
portfolio approach, and to align their product messaging to
address how their offering would contribute to a specific as
opposed to a broad set of portfolio goals. Intermediaries are
becoming more focused on providing the advice that can help
facilitate these discussions, and continue to be an important
conduit for both the hedge fund and the long-only side of
investor portfolios.
Some lingering concerns exist about whether recent
performance is likely to dampen any of these trends, but our
view is that the nature and needs of the institutional investor
audience is likely to overshadow any short-term market
considerations. We at Citi Prime Finance stand ready to help
our clients through these exciting times of change. For more
information on this report or for access to any of the other
thought leadership mentioned in this survey, please feel free
to reach out to us at
prime.advisory@citi.com.
The emergence of institutional investors as the dominant investor category in hedge funds has transformed
the industry. Some of the consequences of these evolutionary changes, such as the requirement for a robust
operational infrastructure and strict risk oversight, have been well discussed. Other impacts have been less
noticeable. This year’s survey is positing that there is a foundational shift occurring in how leading investors are
looking to configure their portfolios. This change would help to reposition hedge funds from being a satellite to a
core allocation. The potential engendered by this change could result in as much as $1 trillion in new hedge fund
capital over the coming 5 years.