The Increasing Importance of Investor Relations for Hedge Funds

Date: Tuesday, March 2, 2010
Author: HedgeTracker.com

For Hedge Fund and Fund of Hedge Fund managers seeking to raise capital, how important is it to develop and maintain an institutional grade Investor Relations infrastructure?

Since the start of the hedge fund industry, the primary source of capital came from direct investors (High-Net Worth individuals) and a select number of private platforms (Family Offices and Fund of Hedge Fund managers). Most recently the hedge fund industry has experienced a significant shift in its primary investor base. It has become more common and acceptable for emerging Hedge Fund managers to seek initial working capital from direct investors, primarily seed capital firms. Direct investors have also taken a back seat to the institutional platform which is comprised of: Endowments, Foundations, Institutional Consultants and Public Pension Plans. A survey conducted by SEI in January 2010 stated that the “…institutional investment community account for about 72% of all hedge fund assets, including funds of hedge funds”. * Since the recent market crash and the shift in the investor base, Hedge Funds and Fund of Hedge Fund managers are being forced to re‐evaluate their current operational infrastructure as a result of meeting the increasing demands of the institutional investor.

One of the biggest demands from the institutional platform is transparency‐ the amount of information a Hedge Fund or Fund of Hedge Fund is “required” to provide to an investor as it pertains to their portfolio holdings. This exchange of information is rather frequent in the long‐only space where the roots of institutional platforms allocations were originally planted. If alternative asset managers are going to be successful in raising capital from this particular investor base they will be required to develop and maintain an institutional grade Investor Relations (IR) infrastructure. IR infrastructure has become an integral part of the manager selection process. According to the SEI survey, “… client service is on par with past performance as a factor in manager selection”.