Hedge Funds and the Institutional Party
The recent move by the Massachusetts Pension Reserves Investment Management Board (MassPRIM) to reduce their exposure to fund of hedge funds and initiate a direct hedge fund investment program highlights the trend by institutional investors to bypass fund of funds for direct hedge fund investments. In addition to MassPRIM, the $23 billion Employees Retirement System of Texas, the $76 billion Ohio Public Employees Retirement System and the $2.5 billion Texas Permanent School Fund have all begun to lay the groundwork for direct investment programs as well. The charts below illustrate the trend towards direct hedge fund placements:
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A desire to eliminate the double-fee associated with fund-of-funds, more portfolio flexibility and greater sophistication with the asset class have all been cited as reasons for this trend.
For hedge funds, this development is a double-edged sword. While institutional investors are considered attractive clients due to the “stickiness” of their investments, the requirements to attract institutional capital are generally much higher. In addition to a focus on the investment process, hedge funds are now expected to maintain world-class operations with a focus on risk management, operations, technology and reporting.
As a result, funds must now demonstrate their capabilities in maintaining an established and sophisticated infrastructure utilizing best-in-class technology and processes. These capabilities are no longer ‘nice-to-haves’ but ‘must-haves’ in order to be invited to the institutional party. And while “transparency” has been the big buzz word in this post-Madoff world, what is of paramount importance for investors (and their consultants) is that funds have the capability to deliver the information they need, when they need it and in a format they want it in.
A number of institutionally-focused hedge funds have already implemented solutions like IntraLinks to satisfy the growing reporting requirements of their investors. By offering their investors (and prospective investors) a robust and flexible platform to deliver information, hedge funds can demonstrate a commitment to establishing a best-in-class infrastructure.
As institutional investor’s assets move from the fund-of-fund to direct investment model, hedge funds will be faced with a greater number and more varied client base, each with their own information requirements. Utilizing a best-in-class reporting platform will be a key component to be invited to the institutional party.