We are pleased to present AIMA’s latest research, ‘In Harmony – how hedge funds and investors continue to strike the right note in aligning their interests’. Three years after the ‘In Concert’ paper was published, this new research paper builds on those findings. It examines to what extent these trends are continuing, as well as identifying how hedge funds and investors are aligning interests that best meet their mutual needs.
Assets under management for the hedge fund industry continue to break new records, as it attracts an increasing number of institutional investors. Their views and expectations of hedge funds have brought about significant changes impacting the overall industry. In the simplest terms, this revolution centres on three Cs – customisation, collaboration and communication.
The industry’s institutional, experienced and sophisticated investor base has driven the change towards bespoke investment mandates, value advisory services – and deeper partnerships that now create a closer alignment of investors’ and hedge-fund managers’ interests.
Our analysis reveals that investors and managers are exploring new approaches to negotiate fees and fund terms, and that hurdle rates are more widespread. The widespread use of the ‘2 and 20’ compensation model is now consigned to the past and we have observed increased use of ‘tiered fees’ for investors. A new equilibrium in the alignment of interests is on the horizon.
Customisation and co-investing mean hedge-fund managers can now deliver solutions that meet their investors’ specific risk and return goals. This trend has been accompanied by a recognition of the value of accurate and informed communication between investor and manager, allowing for a productive exchange of knowledge between both parties and an increased understanding of investment strategies by investors.
We would like to thank AIMA’s research committee and the representatives of AIMA’s global investor steering committee for their valuable input and for taking the time to discuss these findings. We would also like to thank the various managers who provided the number of testimonials included throughout this paper.
Finally, we thank you for your time in reading this paper. We hope you enjoy it.
Managing Director, Global Head of Research and Communications, AIMA
National Asset Management Leader, RSM US
The findings from this year’s survey are based not only on what is current practice between hedge funds and investors, but also potential future developments and how these could be best implemented.
Below are the six key takeaways that emerged from this year’s survey:
1. Moving towards a new equilibrium
2. Beyond 2 and 20
3. From manager-led products to investor-led solutions
4. Skin in the game
5. Sharing the expense
6. Partnering with investors
1. Hedge-fund manager survey with input from 118 hedge-fund managers (referenced as respondents throughout the paper) globally representing approximately $440billion in assets under management (AUM)3. For simplicity, the use of hedge funds and hedge-fund managers are used interchangeably throughout.
2. In depth roundtable discussion and one-to-one interviews with hedge funds to improve understanding of the key findings from the manager survey. Throughout this report, you will see several testimonials from hedge-fund managers who participated in various roundtable discussions.
3. Input from a global investor steering committee which manages more than $1trillion in AUM and allocates approximately $100billion in AUM to hedge funds.
4. Input from a relevant thought leadership and external research across various hedge fund industry stakeholders. These include investors, hedge-fund managers, hedge fund industry service providers and policymakers.
Faced with what is fast becoming a buyers’ market, hedge funds are becoming more responsive than ever. Hedge funds and investors are forging deeper partnerships. These are characterized by customised investment mandates, as well as offering value advisory services. Over the coming years, there will likely be greater fund transparency, true knowledge sharing and more co-investment options as hedge funds and investors align their interests more closely. By cultivating these arrangements, hedge funds can retain investors and build goodwill with them.
Flexibility remains the key for hedge funds wanting to deepen their partnerships with investors. This reflects a general trend within the hedge industry as it moves away from the product-led environment of the past to a marketplace populated by more bespoke investor solutions.
Hedge fund should not lose sight of their ultimate purpose: to help clients - ranging from pension plans to charitable organisations - meet their investment needs. As an industry, they need to stay focused on that commitment, prepared to listen to its clients and think about how best they can help them. Our previous paper talked about hedge funds being ‘In Concert’. Borrowing a phrase from the title of this paper, it is now apparent that they also need to be ‘in harmony’. Put simply, hedge funds that embrace innovation and flexibility will succeed and grow.