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Institutional Investment in Hedge Funds: Evolving Investor Portfolio Construction Drives Product Convergence
I
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In Part I of the report (Sections I-III), we focus on the investor
side of this story. We examine the evolution of portfolio
theory and how these doctrines impacted institutional
portfolio construction in the late 1990s/early 2000s, setting
the stage for these participants to become the predominant
investors in the hedge fund industry. We also detail a new
risk-aligned approach toward constructing portfolios that has
the potential to dramatically increase the use of hedge fund
strategies, repositioning them from a satellite to a core holding
in institutional portfolios. We conclude this examination by
looking at how interest from each of the major institutional
investor categories is likely to progress, and what the total
impact could mean for overall industry AUM.
In Part II (Sections IV-VI), we turn our attention to how both
hedge funds and traditional asset managers have evolved
their offerings, examining why the gap between product
types has narrowed and detailing where these managers are
now beginning to offer competing products. We delve into
the structural advantages and the perceptional challenges
affecting asset managers’ efforts to expand their product
set, and focus on which managers in the hedge fund space
are best positioned to expand their core offerings and why.
We then look at the range of product innovation occurring
across the largest of hedge fund participants, and examine
the potential fees and asset pools available in each. Finally,
we calculate what the individual and total opportunity may be
to add assets in long-only and regulated alternative products.
In Part III (Section VII), we bring these arguments together,
discussing how hedge fund managers and asset managers
looking to offer hedge fund product can best align their
marketing efforts to the various portfolio configurations
being used by the institutional audience. We also explore
the changing role of key intermediaries, and discuss how
managers can leverage these relationships to improve their
contact and understanding of investors and expand their
reach into investor organizations.
Introduction
“To me, investing is about going back to the basics. Why do I
want to be in this asset class? Why do I want this product?
Where does it fit in my portfolio? Once I know the answer to
those questions, then I find a manager that fits the mandate.
The onus is really on the investor to knowwhy they’re creating
the portfolio they’re creating,”
– European Pension Fund
Over the last several years, a paradigm shift has occurred in both the way institutional investors include
alternative strategies in their portfolios and in the way hedge fund managers and traditional asset managers
position their offerings for this audience.