Hedge funds now too staid for some investors


I've noted often that the rise of large institutional investors as the most important class of limited partners has had a profound effect on the hedge fund industry.

Gone are the days when the general partners called the shots, and limited partners were mainly wealth individuals. As the industry rocketed past $2 trillion in AUM, the big institutional investors became the main powers. In the wake of the financial crisis of 2008, they ended up with much more influence. These days they demand a wide range of compliance assurances, favorable gating policies, third party administration and a higher level of professionalism at all levels.

In some ways, the more established funds have become a bit staid, too staid for wealthy investors seeking more risk. Reuters reports that, "Rich private investors are turning their backs on hedge funds because moves to attract more conservative pension fund clients mean managers no longer deliver the big returns they crave. The fastest growing source of new money for hedge funds is now pension funds and insurance companies who want managers to go easy on risky trades. Funds are finding it hard to say no to the big money these investors offer so rich clients are feeling neglected."

One expert was quoted saying, "High net worth investors went into hedge funds in many cases because they personally knew the manager, they wanted significant returns and weren't hugely concerned with monthly numbers or volatility. Institutional investors want uncorrelated returns and low volatility from hedge funds. (They) want different things."

So what to make of this thesis?

My sense is that it's a bit of simplification that hedge funds have gone conservative to attract institutions. They may have professionalized a bit, but institutional investors want growth above all else and are willing to invest in high beta funds as part of a diversified approach. It will be up to hedge funds to market themselves to institutions in terms of risk tolerance levels. Track records will be important.

For ore:
- here's the article