By: Denis Melekhov
In the past, high net worth individuals have traditionally been the primary source of hedge funds’ assets and have been their catalyst for growth. This trend began shifting notably around the year 2000, when institutional investors such as pension funds, governments, corporations and insurers started significantly increasing their allocation to hedge funds. As this tendency has progressed over time, institutional investors now represent a majority portion of hedge fund assets.
Hedge funds have begun catering to the changing client base by not only modifying their investment strategies (with the introduction and expansion of SMAs, for example), but also by making changes to their capital-raising models by increasingly relying on investment consultants and databases. As a result of these changes, competition between hedge funds and traditional asset managers is becoming more commonplace, since they are now competing for the same investor assets.
Along with the change in the nature of investors, so too has come a change in the nature of investors’ demands. Simply delivering solid returns is no longer sufficient, with transparency and operational efficiency both increasingly becoming a key point of investor concern.
As hedge funds grow in AUM, they reach certain thresholds in operational complexity, beyond which additional and significant expenditures on staff and infrastructure are simply unavoidable. These additions tend to unnecessarily bloat the lean and efficient organizational structures of hedge funds and result in considerable overhead costs without adding major value to new business generation. In other words, these are the costs of remaining competitive in the increasingly institutionalized alternatives space – and it is the primary reason why today’s hedge funds are outsourcing these activities.
The most client-facing aspect of operational transparency remains reporting and, in turn, by far the most scrutinized aspect of reporting is fund performance. In an era of greatly increased compliance, both institutional and high net worth investors, family offices and consultants, typically increasingly sophisticated in their expectations, are routinely seeking not only more advanced and more granular performance and analytics metrics, but also the peace of mind achieved via a standardization of methodologies and regulatory compliance.
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