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Whereas previously, before the financial crisis, fund-of-hedge-funds and private wealth clients bolted out of the stable at the first sign of performance lag, today’s investor is a little more forgiving. Looking at this year’s performance figures, they don’t make for too bad a review. Those investors who have managed to allocate to managers returning double-digit returns year-to-date, particularly those focused on sector-specific strategies such as healthcare and technology or distressed debts will be more than satisfied. Indeed, 41 per cent of Asia Pacific investors plan on increasing their allocations to hedge funds over the next 12 months according to a recent Preqin survey.
Despite the importance performance plays, and always will play, it isn’t necessarily at the top of investors’ list of concerns when choosing which managers to invest in. Against a new regulatory backdrop, with the AIFM Directive and Dodd-Frank Act kicking in to gear, and Solvency II and FATCA on the horizon, investors are increasingly likely to focus on other factors such as transparency and regulatory compliance. “I think performance is absolutely still key, it just isn’t as high up the list", says Robert Mirsky, Global Head of Hedge Funds and a Partner at KPMG’s UK Financial Services Practice. “Investors are much more institutional now and this is forcing much of the change in the industry. In our latest global survey entitled The Cost of Compliance most managers, when asked about regulation, said that they were already doing a lot of what is now being required under the likes of AIFMD. If not, they were seen as being un-investable.”
Managers are responding and listening to investors’ needs it would seem. They know all too well the importance of having an institutional-quality governance and risk management framework. For a lot of institutions like UK pension funds, choosing to invest directly into hedge funds means mitigating risk. They are naturally drawn to the biggest, blue chip names. As Mirsky observes: “One manager I spoke to was down to 15 per cent fund-of-funds in terms of total investor assets and welcomed the opportunity to attract longer-term institutional investors. Most large hedge fund managers share this mindset. Their goal is to be matched with like-for-like institutional investors. That’s a big change compared to the last couple of years.”
The danger of pervasive regulation is that the hedge fund industry’s independent streak – it’s spirit of innovation – will be stripped away. As Mirsky points out previously, managers have long understood that “real institutionalisation is not coming as a result of regulation but rather as a natural evolution of the industry. “That’s the way it should be. Regulation is raising the standard but apart from providing certain reporting requirements, for the most part the managers we speak with are saying that they’re not sure to what extent regulation is adding value to investors.”