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.
