Hedge fund managers report a surge in demand from asset owners.
Managed futures specialist Abbey Capital, Dublin, for example, is seeing "increasing demand for customized solutions from institutional investors globally," said CEO Michael "Mick" Swift in an email. Abbey Capital is getting requests from asset owners for trend-following and non-trend-following strategies, he said.
Nearly one-quarter, or $3.5 billion, of the $15 billion in hedge fund assets managed by Graham Capital Management are customized, said James M. Medeiros, CEO of the Rowayton, Conn.-based firm.
Mr. Medeiros said given the high level of demand from asset owners for customized versions of Graham Capital's discretionary and quantitative macro and systematic trend-following strategies, it's become clear that "it's no longer a one-size-fits-all world. If you can do customization, you almost have to."
Most of the investors requesting highly customized versions of Graham Capital's flagship strategies are large institutions intent on making minimum investments of $100 million and more typically, between $200 million and $500 million or more to invest.
Fees also are a consideration for investors, Mr. Medeiros said.
"While investors who make larger allocations often are seeking fee concessions, the reality is that it's more expensive for the manager to run a customized strategy," Mr. Mederios said.
Mr. Medeiros declined to comment on Graham's fees.
Other hedge fund managers are following in Graham Capital's footsteps, sources said.
"There been a sea change in the last two years. We are seeing greater flexibility across almost all hedge fund strategies to customize products to meet client needs," said Joseph M. Marenda, a San Francisco-based managing director and hedge fund specialist in the pension practice of consultant Cambridge Associates LLC, in an email.
"Hedge funds are trying to find new ways to increase their relevance to institutional investors, and customization is one of the keys to that effort. By doing so, they are becoming better partners," Mr. Marenda said.
By way of example, Mr. Marenda said he worked with an event-driven hedge fund to create two customized co-investment funds based on "a couple of their top ideas" that he and a Cambridge client found "attractive ... enough to ask if we could establish a separate vehicle for each idea."
The hedge fund manager said yes, resulting in "a win-win for the hedge fund and my client. (The manager has more assets) and a bigger say in the outcomes of these (strategies), and in effect, we built a custom portfolio for … the client," Mr. Marenda said.
He declined to name the hedge fund manager or the institutional investor.
Hedge funds-of-funds managers also are delving deeper into the customization at both the portfolio level as well as using customized hedge fund strategies as the underlying components of the portfolio.
"Custom is in. Everyone wants it. The concept of customization is intriguing and has cache," said William J. Ferri, the New York-based head of Americas asset management and head of multimanager solutions for UBS Asset Management.
Older commingled hedge funds-of-funds portfolios are shrinking and getting "harder to sell," Mr. Ferri said. UBS Asset Management has $41 billion in hedge fund-oriented strategies.
Corbin Capital Partners LP, New York, still has significant assets managed in its commingled hedge fund-of-funds family, but $3.2 billion of total assets of $7.5 billion are managed in customized portfolios, said Gwen M. Gold, partner and director of marketing and client relations.
Corbin's investment teams work very closely with hedge fund managers and have created customized strategies used in building both commingled funds and separately managed portfolios for individual asset owners, Ms. Gold said.
Some customized strategies created by Corbin's investment teams feature one or more co-investments while others combine less liquid investments to create a longer-duration hedge fund-private equity hybrid vehicle. Other custom approaches are strategy specific and concentrate investments in relative value, event-driven and other hedge fund asset classes.