When it comes to hedge fund investing the line has never been more blurred between consultants and fund-of-funds managers.
Institutional investors like the Nashville and Davidson County pension fund, Maryland State Retirement System and Illinois Teachers' Retirement System increasingly are turning to hedge fund-of-funds managers for consulting advice about their hedge fund portfolios.
Fund-of-funds managers have always been accommodating on an ad hoc basis when asked for hedge fund advice by existing or prospective clients. Education about hedge funds was par for the course and a demonstration of how a hedge fund of funds would work within the overall institutional portfolio was just part of the deal sweetener for a prospective client or a value-added perk for an existing investor.
What's new is that institutional investors are becoming much more explicit about the “non-investment alpha” services they expect their managers to provide, said Von Hughes, managing director with funds-of-funds firm Pacific Alternative Asset Management Co., Irvine, Calif.
“Evolution is driving everything in the institutional hedge funds-of-funds arena. What's new is that institutional investors are totally cognizant of what they will get from their hedge funds of funds. They are going into searches knowing exactly what they want.
“The implied 'contract' is much different and clear: The expectation is that the manager will assist the client in the day-to-day development of a mature hedge fund investment program. Large institutional investors are establishing the service expectations that the whole market is coming to expect, even by much smaller pension plans,” Mr. Hughes said.
PAAMCO managed $9.5 billion in hedge funds of funds for institutions as of Dec. 31.
J. Christopher Kojima, managing director and co-head, alternative investments and manager selection, investment management division, Goldman Sachs & Co., New York, agreed.
“The level of institutional client service is much more intense, more varied than it was in the past,” Mr. Kojima said. “There is increasing demand for very high-touch client services and broader relationships. Clients today require not only commingled hedge fund-of-funds approaches, but also customized solutions, including portfolio construction, tailored research and risk management support. Plain-vanilla approaches are just not cutting it anymore.”
Goldman Sachs managed $19.1 billion in hedge funds of funds as of Dec. 31. Part of the attraction is the hedge fund advice institutions are getting from fund-of-funds managers — whose business it is to know the hedge funds intimately — is free of additional charge. Client services can run from risk management, overall portfolio construction and manager selection for direct hedge fund investments to running clients' direct investments on the fund-of-funds platform.