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Managers bowing more to needs of institutional clients

David Warren said his firm is doing more customization, and the process really is not very difficult.

Hedge fund managers are more willing to cater to the needs of institutional investors given a tough fundraising environment.

Managers are responding to asset owners' requests for new or customized versions of flagship hedge funds that more precisely meet their portfolio construction needs.

Credit specialist DW Partners LP, New York, for example, now runs several customized versions of the firm's flagship Credit Catalysts strategy at the request of existing clients because the narrower versions better fit their requirements, said David Warren, founder and chief investment officer.

Mr. Warren said the process of creating a custom portfolio isn't difficult but the question is "how you can tap the appropriate level of infrastructure at the right price."

Mr. Warren declined to identify the investors using managed accounts for bespoke strategies.

DW Partners managed $3.1 billion in various credit strategies as of June 30 and ranks 73rd in Pensions & Investments' annual hedge fund survey (see list below).

Industrywide, both established and emerging hedge fund firms are following a similar path, said attorney Peter Greene, a partner and vice chairman of the investment management practice of Lowenstein Sandler LLP, New York.

Mr. Greene said hedge fund managers are obliging institutional appetite for non-standard investment arrangements in two main areas.

Large hedge fund managers, for example, are receiving a high volume of requests from pension funds and other institutional investors to set up special investment vehicles (aka separate accounts). SIVs allow investors to "curate their own portfolios by picking just the strategies they want," Mr. Greene said.

He noted that from a business perspective, SIVs tend not to require more investment personnel because the manager makes block trades then allocates assets to each portfolio, but they do often necessitate additional administrative staff.

As for minimum account sizes, Mr. Greene said: "While it depends on the manager — AUM, established or startup — and the circumstances — how favorable the terms are to the manager or whether there is a pre-existing relationship between the institutional investor and the manager — a fair range is $50 million to $100 million."

Another point of accommodation by new hedge fund firms, especially those being launched by "well-pedigreed managers" is at startup, Mr. Greene said, when large allocations from one or two "day one" institutional investors are welcomed. Unlike founder's shares, which offer good terms for early investors, day one investors share in the profitability of the firm as it grows in exchange for a substantial investment, generally between $150 million and $200 million, Mr. Greene said.

"These new hedge fund managers are willing to accept one or two of these day one managed accounts" because they need the jump-start of a few hundred million dollars at the outset but not more, Mr. Greene stressed.

New strategies

Other hedge fund managers have responded to requests for investment solutions from institutions by launching new strategies.

For example, in March, Bridgewater Associates LP, Westport, Conn., introduced a new family of funds featuring ready-made combinations of alpha and market betas.

The new funds employ Bridgewater's long-running Pure Alpha hedge fund strategy as an overlay on passively managed investments within a commingled fund.

The firm's clients frequently overlay Pure Alpha on beta-driven stock and bond strategies to reduce risk and add diversification. The single-fund format simplifies and streamlines the operational process for investors.

The new funds are available only to existing clients, who may shift money from other Bridgewater strategies into the new funds.

Bridgewater is the largest hedge fund in P&I's rankings with $123 billion managed in hedge funds as of June 30.

Hedge funds-of-funds managers also are leaning on hedge fund managers to be receptive to investors' needs.

"Ever since the crash but much more so recently, there's been a really good shift in client focus by hedge fund managers Now, it's a lot more about the client's interests and less about the manager," said Tracy McHale Stuart, CEO, Corbin Capital Partners LP, New York.

"The hedge fund industry really is bifurcating into hedge funds that will work outside of standard structures and find a way to meet the request and those that will not," she added.

Corbin has significantly increased its ability to oblige investors with customized approaches such as setting up an opportunistic credit hedge fund-of-funds strategy in a commingled fund for a Taft-Hartley pension funds that fits the needs of multiemployer plans.

The fund was launched in July 2016 and has attracted roughly $700 million.

Corbin ranked 22nd in P&I's survey of hedge funds-of-funds managers with $4.8 billion under management as of June 30.

Customized strategy

Corbin crafted a customized strategy for one of its Taft-Hartley plan clients, the $3.5 billion New York State Nurses Association Pension Plan and Benefits Fund, Albany.

The plan originally invested in Corbin's flagship commingled fund, Pinehurst, in 2009, but the multistrategy fund "didn't fit us well. The fund meets the liquidity needs of most funds but because our plan is fully funded, we can lock up capital for a little longer and target specific risk premiums such as an illiquidity premium. For us, one size did not fit all," said Case W. Fell, chief investment officer of the pension plan.

Investment staff asked Corbin to set up a separate account and gave the manager full investment discretion to increase the duration and maximize the efficiency of the $231 million allocation. Corbin can invest in its own commingled strategies, directly in hedge funds and in co-investments with hedge fund managers.

Mr. Fell said the target return for the separate account was set to be 100 basis points higher than that of the Pinehurst fund, or the return of U.S. Treasury bonds plus 8 percentage points with expected volatility of less than 6% over a full market cycle.

The separate account was launched on Oct. 31, 2015, and has met expectations, Mr. Fell said, noting the preliminary year-to-date return of the Corbin strategy as of June 30 was 4.4% with 3.4% volatility.