The financial industry crisis has exposed the unpredictability of the market, which in turn, has placed the odds in favor of hedge funds. Institutional investors, notorious for their conservatism, are now placing their bets on the less regulated hedge fund model. Hedge funds have demonstrated their ability to make strategic, risk-driven returns that take advantage of the market’s vulnerabilities.
Mutual Fund Model
The more passive mutual fund model has become less popular among institutional investors. Mutual fund administrators buy and then hold on to investments for longer periods of time. They take less risk compared to hedge funds. This means mutual funds lose the many immediate, profit-generating opportunities that are presented by the volatile movement of the market.
Hedge Fund Model
Pension funds and other institutional investors have increasingly been placing their money into hedge fund investments.Hedge funds are riskier, but can be significantlymore profitable, especially when fund administrators possess sufficient experience and exceptional strategy that can maximize returns both in the short-term and the long-term.
Talented Fund Managers
Hedge fund management has also been witnessing an influx of talent. Investors are aware of this trend and expect the most competent traders and administratorsto be in the hedge fund industry. These asset managementprofessionals were turned off by the heavily regulated and more conservative mutual fund industry. They prefer the hedge fund model, where they have more freedom to strategize and execute moves that lead to big returns.
The Demands
Institutional investors, who now contribute more than 70% of the hedge fund industry’s capital, are used to a highdegree of service and customer care. They expect transparency and more disclosure of information.
The traditional hedge fund approach of relying on cache and keeping a “secret sauce” does not hold against the expectation of institutional investors. Hedge fund administrators can no longer be so secretive about their process because their investors demand to know how their assets are being handled.
Institutional investors also put premium on accurate reporting and consistent communication. Used to having robust compliance management for their own institutions, they expect the same from their hedge fund managers.
Profit Margins and Capital Growth
To meet the demands of their institutional investors, hedge funds are now building fund reporting frameworks and acquiring other technology that can improve client relations and build investor trust. Marketing, PR, and compliance management now make up 5% to 10% of operational costs. This move decreases their profit margins significantly, but in the end, the benefits seem to outweigh the cost as more hedge funds follow the trend in order to attract new investors and keep existing ones.
