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BW Businessworld

On Industry Demand

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Hedge funds are becoming more "institutionalized" as they respond to greater demands for transparency and due diligence from pension funds and other institutional clients, according to a new survey by KPMG and global hedge fund association AIMA, the Alternative Investment Management Association.

The new global report called "The Evolution of an Industry" found that among the 150 responding hedge fund managers, 88 per cent reported demand for greater due diligence and 82 per cent for increased transparency. It found that hedge fund management firms have improved their operational infrastructure in areas like investor transparency and regulatory compliance as allocations from institutional investors have increased.

KPMG also found that the sizes of hedge funds and their clients are becoming increasingly correlated, with large investors allocating to larger hedge funds. Hedge funds of funds and smaller investors are more likely to allocate to smaller hedge fund mangers. Europe has been the weakest region globally when it comes to raising hedge fund assets since the 2008 crisis.

It found managers who had taken in new money from Europe since 2008 (53 per cent of the respondents) were roughly equalled by those (47 per cent) who had not. In Switzerland the balance was worse, with 56 per cent of managers reporting less business from there since 2008. In all other regions - North America, Asia Pacific, and the Middle East - a larger portion of managers increased business than lost it.Institutional investor clients provided 57 per cent of respondents' assets under management; that proportion has "grown significantly since the financial crisis," according to the report.

Among all respondents, who have a combined $550 billion in AUM, 76 per cent said their pension fund assets had increased since 2008, while 70 per cent said "other institutional" assets increased. Among the largest firms — defined here as having 100 or more employees — those figures rose to 87 per cent and 80 per cent, respectively. Institutional investors as a whole, including funds of funds, accounted for a clear majority (57 per cent) of assets under management. Andrew Baker, AIMA CEO, said the 'institutionalisation' of hedge funds was defined as much by these attributes at funds, as by their receiving more money from the world's largest investors.

Larger hedge funds — those with assets in excess of $1 billion — were more likely to have demands for greater due diligence and transparency, and were more likely to have added one or more compliance staff members.

The report finds that the increase in institutional investment has led to more thorough due diligence and greater demands by investors for transparency, with 90 per cent of respondents reporting an increased demand for due diligence since 2008.  Eighty-four percent of all respondents indicated they had increased transparency to investors since 2008, which is reflected by the fact that the majority of firms have taken on multiple members of staff to respond to these increased investor demands. The report also found that hedge fund management firms had almost universally increased investment in regulatory compliance since 2008, with 98 percent of firms hiring additional staff in this area. 

"Institutionalisation has been described as the continuing inflow of new institutional capital into the industry, but as this report demonstrates, it is also about the increasing sophistication of operational infrastructure with respect to transparency, compliance and due diligence," said Andrew Baker, AIMA's CEO. 

Robert Mirsky, head of hedge funds at KPMG in the UK, commented: "The combination of an increase in regulation, the changing nature of the investor base, and the natural evolution of the business has made the industry nearly unrecognisable from only five years ago." 

The new report is the second of a two-part series by AIMA and KPMG on the state of the global hedge fund industry. The first, published in April, looked at hedge fund industry performance, risk and volatility.