Institutional investors have become a dominant force in the global hedge fund industry, and their priorities are reshaping the sector and forcing managers to bolster their operations.
In a survey released Thursday by Northern Trust Hedge Fund Services, investors and fund managers expressed often widely differing perceptions on both longstanding and emerging issues affecting the industry.
This matters as institutional investors intend to increase their allocations to hedge funds this year.
Northern Trust found that 90% of managers in its survey said that virtually all of their investors were satisfied with the level of transparency they received.
Not so, said the investor respondents. Fifty-five percent said they wanted more transparency than they currently received — and many were prepared to pay for it.
Seventy-eight percent of those who sought increased transparency said they would be willing to pay as much as three basis points more in management fees to support the operational costs of such reporting.
Respondents also expressed different views on how much independent oversight institutional investors value and the controls managers have put in place.
Ninety-six percent of investors said independent verification of cash processing was extremely or somewhat important, while 44% of managers said they had independent controls on cash.
Moreover, 43% of investors considered independent checks on portfolio risk calculations extremely important, yet only 13% of managers could say they used independent controls.
“Despite the ongoing push for transparency, a majority of hedge fund investors are still seeking more insight into their investments,” Peter Sanchez, the head of Northern Trust Hedge Fund Services, said in a statement.
“Bridging the transparency gap goes beyond costs. It requires a balance where investors get the reports they need while managers retain ownership of their unique strategy. We believe providing insight into risk is one approach to bridging that gap.”
For the new report, Northern Trust in partnership with Asset International surveyed some 100 hedge fund managers and 300 institutional investors in North America, Asia/Pacific, and Europe, the Middle East and Africa. Twenty-three percent of managers and 40% of investors had more than $10 billion in assets.
Post-2007 regulation has affected many changes in the hedge fund sector. The survey found that 59% of managers and 53% of investors believed that some regulations had helped reduce the likelihood and severity of another financial crisis.
Skeptics begged to differ. Forty percent of investors and 34% of managers said the new regulatory environment would not prevent a future crisis.
Hedge fund managers and investors in the survey agreed on the need to recruit and retain top talent over the next five years.
They disagreed, however, on issues related to regulation and fund operations, which were top priorities for investors.
Fifty-six percent of investors and 45% of managers ranked talent recruitment and retention as their top two priorities.
Forty-six percent of investors also ranked regulation, including regulatory reporting and investor due diligence, as their number one or two priorities, and 56% put operations and internal infrastructure at the top of the priority list.
At the same time, less than one-third of managers similarly ranked regulation and operations as top priorities.
“The strength of a fund’s operations is evolving into a key driver of success as it allows managers to adapt more quickly to the ever-changing regulatory climate and address the transparency demands of their investors,” Sanchez said.
— Check out Hedge Funds Start Year Fast on Strength of February’s 2.5% Return on ThinkAdvisor.