Hedge fund-of-funds managers are encountering increasing demand from institutional investors for customized or separate accounts.
Between 20% and 30% of new hedge fund-of-funds searches this year are for firms that can accommodate more customized investment vehicles, vs. 10% to 20% in 2006.
With $47.9 billion in new flows to hedge funds of funds this year as of Sept. 30, according to Hedge Fund Research Inc. in Chicago, that 30% would translate to roughly $14 billion going into the accounts.
Among the pension funds that have selected or are considering custom or separate hedge fund-of-funds this year are the $18 billion Doctors Pension Funds Services, Utrecht, Netherlands, and the $24 billion Iowa Public Employees Retirement System, Des Moines. It is believed the $42.3 billion Teachers Retirement System of the State of Illinois, Springfield, used separate accounts for its $500 million allocation to hedge funds earlier this year; Eva Goltermann, public information officer, declined to comment.
The newest approaches are separate accounts set up for a single client to invest in commingled subaccounts with underlying hedge fund managers; customized funds of funds, which can vary slightly or significantly from the managers flagship investment strategy; a combination of the two; and managed account platforms in which each underlying hedge fund manager creates individually tailored hedge fund portfolios.
The change is evolutionary, begun by large institutions like endowments and foundations some years ago and only now gaining speed.
There is a natural evolution as second- and third-phase institutional hedge fund investors want to create unique, high-impact portfolios, with desired, specific portfolio exposures or investment constraints, said Tracy McHale Stuart, chief executive officer of fund-of-funds manager Corbin Capital Partners LLC, New York.
Second generation fund-of-funds investors want to be able to mix and match strategies, create completion funds that provide exposures missing from their hedge fund or overall portfolios, invest in more concentrated best ideas funds and, in some cases, co-invest in underlying hedge fund deals alongside the manager, she said.
Corbin manages about $3.6 billion mostly for institutions; about 30% is managed in separate accounts and customized hedge fund-of-funds portfolios.