Smaller hedge funds suffer in insto-driven market

Smaller hedge fund managers, which may well include some of the best performers, are struggling for inflows due to the institutionalisation of the hedge fund industry, new research from Preqin indicates.

A survey of 60 hedge fund managers by global alternatives research firm Preqin shows that the proportion of hedge fund manager assets sourced from the institutional market, such as pension funds, has risen from 45 per cent in 2008 to 61 per cent in January this year.

The good news for investors is that this trend has been accompanied by increased use of risk management procedures, lower fees and increased transparency from the managers.

However, smaller managers – which often perform best in capacity-constrained strategies in particular – are struggling to attract their fair share of the increased institutional flows.

Preqin estimates that from its database of 2,500 institutional investors in hedge funds, the average minimum requirement for a manager’s assets under management to be investable is around $320 million. The survey results show that managers with less than $250 million get only 45 per cent of their money from institutions, whereas managers in the next category, $250-499 million, get 59 per cent. The largest managers, with more than $10 billion under management, get 67 per cent of their funds from institutional investors.

The Preqin report says: “Moving from an asset class predominated by wealthy individuals and family offices to an institutionally focused industry has fundamentally changed the hedge fund market.

“Nearly half of the respondents – 46 per cent – stated that having more institutional investors in their funds has resulted in the firm putting more risk-management procedures in place. Institutional investors have to take into account their responsibilities to meet funding needs, as well as fulfilling regulatory procedures put in place by boards of trustees or wider legislature within their jurisdictions.”

Almost as many respondents – 42 per cent – also said that an increasingly institutional client base has led to a reduction in fees.

“Recent Preqin research has revealed that investors are just now beginning to feel that the fees charged by hedge fund managers have reached a level which is mutually acceptable to both fund manage and institutional client.”

About one-in-five managers has also introduced alternative investment structures, such as UCITS-registered funds in Europe and managed accounts or discretely managed mandates.