Institutionalisation of the hedge fund industry continues apace. According to Credit Suisse’s mid-year Hedge Fund Investor Sentiment Survey, 93 per cent of institutional investors plan to maintain or increase their allocations to the sector in the second half of this year.

And the longer term trend is for more of the same. For instance, a recent report by KPMG, the Alternative Investment Management Association (AIMA) and Managed Funds Association (MFA) found that over the next five years most managers expect a significant shift in their primary capital sources, away from corporate pension funds and HNW investors towards public pension funds.


Satisfying expectations
To pass muster with these institutional clients, hedge funds must prove they are up to the task operationally. Key focal points include:

• Show value – Heightened investor scrutiny on performance and fees makes it imperative hedge funds optimise their risk-adjusted returns. Focused research and analytics, efficient trade execution and enhanced risk management capabilities will help, while granular performance attribution enables managers to demonstrate where they add value.
• Transparency – Institutional investors demand significant transparency. In response, hedge funds need clear and documented investment processes, detailed performance measurement and attribution, and rich reporting functionality. 
• Regulatory compliance – Compliance is an enterprise-wide activity dependent on a robust end-to-end infrastructure that encompasses everything from verifiable data inputs through to performance measurement best practices, accurate partnership accounting and on-demand reporting. 
• Flexibility – The KPMG/AIMA/MFA report predicts product customisation will become increasingly commonplace, with institutions favouring managed accounts and funds of one. To meet institutions’ individual risk, return and fee demands, hedge funds need the operational flexibility to diversify into different asset classes, markets, investment strategies and fund structures.
• Client service – Maintaining high service levels can help enhance the ‘stickiness’ of institutional money, for example by providing customisable reporting, and responsive and personalised client relationship management.
• Robustness and scalability – A proven, resilient, automated technology infrastructure can mitigate operational risk and guard against performance or capacity degradation as a hedge fund attracts assets.
• Cost efficiency – With fees under pressure, hedge funds will need to enhance operating efficiencies by automating processes wherever possible.

A sophisticated technology environment may be no guarantee of success, but it does give hedge funds the operational support to attract and retain those increasingly important institutional investment flows.


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