Part 4: Meeting The Growing Investor Demands
Successful hedge funds put investors’ interests ahead of their own, accommodating them on several aspects of their business, including fee structure, liquidity provisions and their demand for greater oversight.
“For new funds, the ownership structure and the economics of the manager have to be aligned with their clients,” according to a CIO of a boutique wealth management private bank institution in Greenwich, Connecticut.
Christian Bekmessian, EisnerAmper Tax Partner and Co-Chair of the firm’s Financial Services Group, specified that of the hedge fund clients he helped launch, the ones that thrived the most were flexible with their business decisions, keeping investors’ interests in mind.
“It’s important to be aware of what the investors are looking for,” he said. “Generally speaking, institutional investors are coming in and asking for better terms; for better everything. They want more transparency.”
- Fees: Managers lowered their fees to cater to allocators, often dropping their management fee from 2%, formerly the industry standard, to 1.5%. However, given the fee reduction, which is a big difference, managers are faced with a tighter budget.
- Liquidity/Transparency: Managers have been transparent with their investors, especially the big institutions, who inquire what they are holding at all times.
- Greater oversight: Managers have accommodated investor demand for greater oversight, hiring an outside administrator and more personnel internally. Some of that cost has fallen on the investor, such as the outside administrator, while some has been the responsibility of the manager when they hire more staff.
It’s important for a manager to be flexible with their business decisions as they relate to investor demands but not in their investment style. Advisors concurred that founders must stick to their core investment thesis they had success with previously.
“One of the top three things I look at when allocating to a new hedge fund is ensuring that their investment strategy will be the same they ran at their prior firm,” said a CIO of a New York-based family office.
Further, Peter Cogan, Co-Chair of EisnerAmper’s Financial Services Group has experienced the same sentiment.
“Investors want to allocate to the manager because of their success in running their flagship strategy,” he said.
It is imperative that fund managers be honest with investors and convey to them if their strategy does not fall in the remit of what the allocator is looking for -- they will be more respected for sticking to their core investment thesis, rather than changing it.