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. However, this trend began to notably shift around the year 2000, when institutional investors such as pension funds, governments, corporations, and insurers started significantly increasing their allocation to hedge funds. The shift was the result of hedge funds’ ability to source an alpha typically not associated with traditional markets to investors who were seeking to diversify their portfolios and hedge against adverse market conditions. Over the past decade and a half, institutional investors have grown to represent a significant portion of hedge fund assets.
As this shift has happened, 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 relying on investment consultants and databases. As a result of these changes, competition between hedge funds and traditional asset managers is becoming more common, 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. Transparency and operational efficiency are both key points 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 increased compliance, both institutional and high net worth investors, family offices, and consultants, all who are increasingly sophisticated in their expectations, are routinely seeking more advanced and more granular performance and analytics metrics, as well as the peace of mind achieved via a standardization of methodologies and regulatory compliance.
Here at SS&C, we leverage a sophisticated, world-leading performance platform and a global team of high-caliber experts to handle your ongoing production and reporting needs pertaining to performance measurement and analytics, attribution, ex-post risk measurement, and GIPS compliance. With our performance platform, you can concentrate on things that matter most while you enjoy instant access to your data via a state-of-the-art, interactive and customizable web-based dashboard from anywhere in the world.