The access options open to investors, other than investing directly in hedge funds, are: purchasing units in commingled fund of hedge funds; setting up a series of managed accounts managed by hedge fund managers; investing in hedge funds across a number of managed accounts via platforms; and investing in hedge funds via a segregated account.

The paper says that only fund of hedge funds and segregated accounts can access the entire hedge fund universe (including hedge funds on managed account platforms) and sensibly be used to manage a diversified portfolio of hedge funds.

In terms of liquidity, under normal market circumstances a fund of hedge funds has the best liquidity as, on aggregate, its terms are typically better than the underlying hedge funds.

In exceptional markets (i.e. large co-investor redemptions or underlying hedge funds materially altering liquidity terms) the presence of co-investors and the requirement of a fund of hedge funds to treat all shareholders equitably means that liquidity in a fund of hedge funds will be poorer with the down side on managed accounts being that terminating a portfolio can be a lengthy and tricky process.

A segregated account can provide liquidity without regard to co-investors and portfolio integrity.

The paper concludes that from a risk assessment/transparency perspective there is no ideal solution. Clients or their investment advisers will not be able to achieve full transparency across a diversified portfolio of hedge funds (due to the limited universe of managers accessible via a managed account) and therefore will need to rely on measures to aggregate risk.

To this end an active dialogue is required by hedge funds and their investors (and their investment advisers) to secure the required information on directionality, concentration and other risk measures.

The paper adds that one of the more positive trends of the past years is the increased degree to which hedge funds will share relevant information with investors and their investment advisers to enable sensible risk data aggregation and perform risk budgeting exercises.

'We expect such sharing of information to become increasingly formalised and standard practice, indeed we would expect managers of portfolios of hedge funds to use this information when servicing their clients,' it states.

IAM says another positive outcome from the recent events will be a push by investors in hedge funds for these to have their terms in relation to dealing suspensions and gates more narrowly defined and more objectively implemented. This development alongside improved transparency will facilitate portfolio construction, risk assessment and overall management.