As hedge funds recover from the economic crisis and fraud that plagued the industry in 2008, investors are moving back into alternative funds-and requiring more than just uncorrelated returns. Many are demanding funds have institutional quality infrastructures, independent auditors, and significant asset bases to weather highly volatile markets. Endowments, foundations, and pension plans, in particular, are demanding an increasingly sophisticated and professional hedge fund operational structure be in place before they are willing to risk investment.
At BHA, we have spoken with several institutional investors that have indicated one of the most important criteria for their investment committees to consider is the infrastructure that supports the fund. Institutional quality infrastructure can be defined in many ways. It can cover everything from a manager’s back office operations, fund structure, and organization to its independent oversight procedures and valuations.
Institutional investors are also seeking funds with large asset bases managed by experienced financial professionals that have defined positions and roles in the firm, strong pedigrees in the industry, and verifiable track records. Many investors perceive such funds as a more stable investment option and not as susceptible to collapse if negatively impacted by directional bets or redemptions. During the month of August, 57 percent of the hedge fund investors BHA interviewed were only interested in fund managers that had $100 million to $1 billion under management. And in a recent conversation, the head of hedge fund research at a North American consultant said that the firm was considering only funds with more than $1 billion in assets and a ten-year track record.
Investors perceive that funds with large asset bases and long track records have the experience and institutional infrastructure to handle volatile market events. And given the times, investors are in a position to be more selective and demanding. Managers that incorporate this level of sophistication into the administration of their funds will help allay investor concern over instability and outflows.
