Hedge funds are becoming more “institutionalized” as they respond to greater demands for transparency and due diligence from pension funds and other institutional clients, according to a new survey report by KPMG and the Alternative Investment Management Association.
Among 150 responding hedge fund managers, 88% reported demand for greater due diligence and 82% for increased transparency, according to the report, “The Evolution of an Industry.”
KPMG also found that the sizes of hedge funds and their clients are becoming increasingly correlated, with large investors allocating to larger hedge funds. Hedge funds of funds and smaller investors are more likely to allocate to smaller hedge fund mangers.
Institutional investor clients provided 57% of respondents' assets under management; that proportion has “grown significantly since the financial crisis,” according to the report.
Among all respondents, who have a combined $550 billion in AUM, 76% said their pension fund assets had increased since 2008, while 70% said “other institutional” assets increased. Among the largest firms — defined here as having 100 or more employees — those figures rose to 87% and 80%, respectively.
Meanwhile, fund-of-funds assets decreased at 70% of all managers since 2008 and among 83% of the largest firms during the same time period.
“These results underscore a growing tendency for larger institutional investors to gravitate toward larger managers with more institutionalized operations and brands that held a higher level of recognition with in the industry,” according to the report.
Larger hedge funds — those with assets in excess of $1 billion — were more likely to have demands for greater due diligence and transparency, and were more likely to have added one or more compliance staff members.
The report is available on AIMA's website.