Institutional Investors Hedge Fund Due Diligence

Institutional Investors

Institutional Investors Hedge Fund Due DiligenceSEI recently completed a survey of institutional investors and their perspective on hedge funds. 100 institutions were surveyed and 47 were currently invested in hedge funds. Even the ones who were investing in hedge funds had extra due diligence steps to ensure that each allocation to a hedge fund manager is done in a deliberate and cautious fashion.

The problem I have with this is often selecting hedge funds in a "deliberate and cautious fashion" often boils down to a RFP or due diligence checklist where you are basically looking for those 30 hedge funds that can check every box on your list. This is not a bad thing to have in itself but often it becomes the real life and center if not whole process in selecting a hedge fund manager.

"Headline risk" was named by 37% of survey respondents as their biggest worry, followed by lack of transparency (19%) and poor performance (15%). Institutions also remain cautious in selecting hedge funds, the survey found, devoting an average of seven months to due diligence and 12 additional weeks to approval.

Interviewees ranked "consistent, stable returns," "uncorrelated returns," and "high risk- adjusted returns" as more important objectives than "high absolute returns." Seventy-two percent of interviewees said the investment strategy, rather than performance, is their starting point for hedge fund selection.

Paul Schaeffer, managing director of strategy and innovation for SEI’s investment manager services division says, “To maintain that growth trajectory, the hedge fund industry will need to branch out from its traditional high-net-worth, foundation and endowment clientele to serve the broader institutional market.” He adds: “But to compete for those assets, the industry must recognize that large institutions have a distinct set of demands.”

Top 4 Factors Institutional Investors Look For In Hedge Funds

  1. Reporting & Transparency (85% of institutional investors reported that they would not invest in a strategy they did not understand)
  2. Institutional Quality Infrastructure and Operations (54% of institutional investors pointed out that better managed firms return higher performance)
  3. People. Build stable hedge fund management teams At all levels the hedge fund company
  4. Shift away from focusing exclusively on performance to investment disciplines

The white paper concludes by stating:

The take-away message is that institutions clearly prefer to do business with institutional-style organizations," concluded Schaeffer. "For hedge funds, the challenge will be to fit the profile of an institutional-quality fund while preserving the performance attributes that attracted major investors in the first place."

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Related Terms: Institutional Investor Checklist, Institutional Investor Due Diligence Checklist, Find Institutional Investors, Hedge Fund Institutional Investors, Institutional Investors in Hedge Funds

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