Hedge Fund Investors Increase Operational Demands

Date: Friday, October 19, 2012
Author: ProHedge UK

Global hedge fund AUM is back up to pre-2008 levels according to statistics, but that doesn’t tell the whole story. Private investors or high net worth individuals have left hedge funds and Institutional Investors have filled the void by increasing their allocation to the sector.

Part of the package when dealing with institutional investors is that they require an increased level of communication, transparency and service. “As an investor, we try to strike up a relationship with the manager.” Comments Andrew Meleady, COO at Abbey Capital speaking at a panel discussion at GAIM Ops in Paris on Thursday. Meleady explains that his firm almost exclusively invest in managed accounts structures for the purpose of increased transparency and confidence. “We don’t want any surprises from our managers, we look for early warning signs, such as late reports that might sound the alarm.” Investors have tightened the noose and will not accept any form of operational risk from their managers.

Erik Keller, senior analyst at ABN AMRO Advisors echos Meleady “Liquidity has become very important as has transparency which is why managed accounts are so attractive.” Just like any transaction for a product or service, the customer has a right to know exactly what they are paying for, so why should hedge fund investment be any different? The view of Werner Von Baum, partner at LGT Capital Partners is “As an investor you need to be able to understand ‘what am I paying for and what do I get for it?’” Keller Continues “Sometimes it is very difficult to get cost structures from hedge funds which makes it difficult to sell to retail clients.”

The difference in requirements between private and institutional investors has been highlighted by the changes experienced by the industry. Institutional investors favour tailored platforms. In order for hedge funds to survive they must cooperate and evolve, as Meleady puts it “If hedge funds want to survive then they have to adapt to institutional investors’ demands.”
In the US there is less of an emphasis on transparency and Von Baum feels that “perhaps this is because the investor community have sufficient inflows to play with. In Europe, where institutional mandates are harder to come by, managed accounts are more accepted. Ultimately as an investor, you need to strike the balance between performance and service.”

Increased levels of transparency and granularity will result in large volumes of data that need to be processed and analyzed by the investor. “There is a danger of data graves building up” comments Von Baum, masses of data which will never be utilized. However, Keller disagrees “I like data, it helps us understand where performance comes from and most importantly where the fund manager is adding value.”

The whole process of investor due diligence has completely changed in recent years, Andrew Meleady remembers back in 2008 when clients used to visit Abbey Capital for due diligence they would attribute and hour to operational due diligence and on the day they would only spend 5 minutes on it. “In the last 24 months I would be lucky to get away with a 2 hour meeting. These days investors have dedicated teams for operational due diligence alone.”

The panel mused about why there is such mistrust in the industry, that every potential investment must be analysed and investigated to the nth degree. After all, when you buy a car you don’t ask to see all the engine documentation, visit the factory and understand the granular mechanics of the car, you trust the brand. Marc de Kloe, head of hedge funds at ABN AMRO Private Bank concludes: “The car industry IS highly regulated that is the point, everything is well documented. That is where the hedge fund industry needs to improve. At the moment you just cant get all the answers you need. The key is transparency.”

A combination of self regulation, government regulation and investor pressure is forcing the industry to change and become more transparent and trusted. Over time this should result in increased allocation from institutional investors and the eventual return of private investors.

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