Notes from a Hedge Fund Survey - Part II

SEI and Greenwich Associates conducted a survey of institutional investors and hedge funds.  Part I was summarized earlier.  Part II was released later and dealt with issues on investing, institutional standards for fund evaluation, selection and monitoring.  105 investors participated in the survey.  They could be classified as endowments, foundations, family offices, corporate funds, public pension funds, consultants, union plans and non-profit organizations.  85% of the institutions are located in the US with some in UK, Canada and Scandinavia.  Their assets under management (AUM) fit into four bands:

• 42.2% had less than $500 million
• 15.5% had $500 million to $1 billion
• 25.4% had $1 billion to $5 billion
• 16.9% had more than $5 billion

The new top three challenge for investors is manager selection.  This is due to the increasing number of hedge funds being launched due to the recovery in the markets and Graham-Dodd legislation.  Many have indistinguishable strategies.  If a manager can define his unique strategy to investors in understandable terms, he is ahead of other funds.  In terms of the criteria for selecting managers, investors emphasize investment philosophy, the quality of the personnel on the investment team, risk management and having an identifiable, repeatable source of alpha.  AUM of a fund is low in importance for investors when choosing a fund.  20% have no AUM minimum and 15% have a $50 million to $100 million minimum.  The age of the fund does not seem to affect investors.  According to the survey, 14% would invest in a fund with no record and 24% in a fund with one to three year record.  Large institutions are more willing to hire emerging managers.  Smaller investors favor larger, more established funds.  Smaller investors also are more likely to hire investment consultants for their advice.  Larger investors are more likely to invest directly in hedge funds.

The other worries have remained the same since the credit crisis in 2008 - portfolio transparency, poor performance, leverage, risk management and liquidity.

Family Offices and Hedge Funds

I read a recent post at Simon Kerr's Hedge Fund Blog about family offices.  They are not included in the institutional investor universe but have several advantages investing in hedge funds.  The firm Rothstein Kass polled 151 family offices.  85% are in hedge funds and 90% of them are planning to increase their investments.  On the other hand, only 50% are invested in private equity.

There are two types of offices:  Wealth Creators (71%) and Wealth Preservers (29%).  Creators are more likely  to add to their hedge fund investments.  Many of them lost capital during the credit crisis and are trying gain it back.  The most popular strategies were equity long/short, distressed and arbitrage.

Simon summarizes the advantages as follows:

• Family offices tend to have long-term investment horizons. 
• They tend to want to live with decisions for some time – as a source of "sticky money" they won't flip a multi-year investment proposition after a couple of bad quarters.
• The investment decision making is often quicker than either funds of hedge funds or institutional investors that use consultants to select hedge funds.
• Due diligence of family offices is less invasive and time consuming than for investing institutions.
• They typically require less client servicing resource than other investors in hedge funds.
• They tend to have less restricted selection criteria than institution al investors – family offices can invest in niche strategies, emerging managers and small funds.

The source material for Simon's article can be accessed here.