Institutional investors increasingly are asking for — and receiving — customized versions of flagship hedge fund strategies that better meet their investment needs at a significant discount.
Because custom hedge fund and hedge funds-of-funds strategies generally are offered as separately managed accounts, the investor has complete control and transparency within its account, including access to managers' real-time portfolio holdings, industry sources said.
Hedge fund managers are creating a wide range of customized strategies at the request of asset owners.
Variations include tweaking standard flagship strategies, isolating and investing in a particular strategy from within a multistrategy portfolio approach and building a specific solution to a portfolio issue, interviews with large asset owners showed.
"Customization is the new normal for institutional hedge fund investors," said Michelle Noyes, the New York-based managing director and head of Americas for the Alternative Investment Management Association Inc., an international industry group.
"The hedge fund industry has become more institutionally oriented, and asset owners are becoming more demanding. With customization, asset owners can get more of what they want in hedge fund strategies," Ms. Noyes said.
An AIMA survey of 118 hedge fund managers conducted in the first quarter this year found that 53% of respondents agreed that offering customized solutions to asset owners is important to aligning their interests with the investor, compared with just 14% in 2016.
For now, only large asset owners are able to command customized portfolios, having the heft to meet minimum mandate sizes of at least $100 million. That's enough to convince a hedge fund manager to custom craft a strategy, set up a separately managed account and deal with compliance and operational issues, said Steven B, Nadel, a partner in the asset management practice of Seward & Kissel LLP, a New York law firm.
"From the perspective of a large hedge fund manager, offering customized strategies is driven by supply and demand. Is the (separately managed account) worth the hassle? It depends on the size," said Mr. Nadel, whose practice includes working closely with both investors and hedge fund managers to set up customized hedge fund vehicles.