Survey Says Mid-Sized Hedge Funds Not Ready to Meet Institutional Investor Demands

Nov 17 2010 | 11:53am ET

New research from RSM McGladrey says mid-sized hedge funds with $100-$500 million in assets face a "reality gap"—95% of those surveyed believe they can meet the demands of institutional investors but only 22% have more than one full-time employee responsible for client services.

For McGladrey`s 2010 Hedge Fund Survey, Greenwich Associates interviewed 52 U.S. hedge fund executives with average AUM of $300 million.

In addition to the findings mentioned above, the survey revealed that only 9% of respondents had highly automated reporting systems.

"Attracting institutional assets will require new ongoing personnel expenses for the majority of mid-sized hedge funds, as well as significant up-front investments in technology to increase reporting capabilities," said Alan Alzfan, a managing director in the Financial Services Group at RSM McGladrey.

More than 90% of the 52 U.S. hedge funds surveyed have an unfocused business model, targeting all investors: institutional, fund of funds and high net worth individuals (HNW)/family office. Nearly half (47%) of funds for whom institutional investors represent a majority of clients say having a dedicated client service team is "critically important" in winning assignments.

In addition, 37% of mid-sized hedge funds report more burdensome reporting requirements regarding performance and risk. Almost 85% believe that their current infrastructure is sufficiently scalable to handle client reporting needs for the next five years, yet 26% report having either "manual" or "highly manual" reporting systems.

Nearly two thirds (64%) of hedge fund managers state that institutional clients are "more burdensome" than HNW/family office clients, often providing questionnaires of 30-40 pages in length during the due diligence process and calling provided references. 
There is also a new emphasis on liquidity, with one-third of funds planning to allow liquidity on a more frequent basis and reducing their lock-up periods as a means of attracting investors.

"Some managers will choose to limit or even cease activity in the institutional space given the changes that are necessary to the funds' business model to compete for institutional assets," said Alzfan. "But managers who want to gain consistent access to institutions' large allocations of capital and the resulting fees—both management and incentive—will have little choice but to take on at least some of the risks involved in investing in their funds' infrastructure and adjusting their liquidity terms."


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