AIMA

The Alternative Investment Management Association

Alternative Investment Management Association Representing the global hedge fund industry

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Operational infrastructure and transparency to investors

By Andrew Baker, CEO

AIMA

Q3 2012

Q3 edition

 


 

Later this month, our third Annual Conference in London will feature a number of very distinguished keynote speakers, our traditional regulatory panel and, for the first time this year, an “investor and performance” panel.

Placing investor-related topics at the centre of our Annual Conference further cements our already strong connections with the global hedge fund investor community.

As many of you will be aware, a number of institutional investors in hedge funds are members of AIMA, and our Investor Steering Committee has been responsible for some of our most important publications of recent years, including the Roadmap to Hedge Funds and last year’s Guide to Institutional Investors’ Views and Preferences. (Both publications are available on our website.) Returning to the conference, the author of the Roadmap, Alexander Ineichen, is among those participating on our “investor and performance” panel.

One of the trends we have been focusing on this year is the impact that increased institutional investment is having on the industry. You may have seen the publication of our recent report, entitled “The Evolution of an Industry”, that we put together with KPMG, the international network of audit, tax and advisory firms. The report was based on a survey of and in-depth interviews of 150 hedge fund management firms globally with more than $550bn in combined assets under management.

Institutionalisation has been described as the continuing inflow of new institutional capital into the industry, but as our report demonstrated, it is also about the increasing sophistication of operational infrastructure with respect to transparency, compliance and due diligence.

The report’s main finding was that the post-2008 influx of institutional money into hedge funds has resulted in a marked increase in the global industry’s operational sophistication and transparency to investors. It showed how hedge fund management firms have increased their operational infrastructure in areas like investor transparency and regulatory compliance as allocations from institutional investors have increased.

Regarding inflows, 76% of respondents observed an increase in investment by pension funds since 2008, while institutional investors as a whole, including funds of funds, accounted for a clear majority (57%) of assets under management.

This increase in institutional investment has led to more thorough due diligence and greater demands by investors for transparency, the survey found, with 90% of respondents reporting an increased demand for due diligence since 2008.  Eighty-four per cent of respondents indicated they had increased transparency to investors since 2008, which is reflected by the fact that the majority of firms have taken on multiple members of staff to respond to these increased investor demands.

The report also found that hedge fund management firms had almost universally increased investment in regulatory compliance since 2008, with 98% of firms hiring additional staff in this area. And the amount of time managers say they spend handling due diligence inquiries from investors has doubled since 2008.

Our research also found that both large and smaller managers are confident that there will be strong inflows into the industry over the next several years, and that is certainly our expectation too. Just like larger firms, boutique players continue to demonstrate an ability to evolve and, indeed, thrive in this changing business landscape.

Our ‘Evolution of an industry’ report was the second of a two-part series with KPMG looking at the global industry. The first of these reports, entitled ‘The value of the hedge fund industry to investors, markets and the broader economy’, which I discussed in my editorial for the last AIMA Journal, considered what has been driving this increased institutionalisation – namely, powerful proof of hedge funds’ ability over the long term to generate stronger returns than equities, bonds and commodities and to do so with lower volatility and risk than equities.

A lot has been said this year about the hedge fund industry’s historic performance, and the value to investors of making ever larger allocations to hedge funds. As I hope our two reports with KPMG, the Roadmap and our other publications for investors have been able to show, both investors and managers are contributing to, and benefiting greatly from, this process of institutionalisation. We wish them all continued success.

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