Institutional investors driving “the new active management”: Report

Casey Quirk just released its latest treatise on the hedge fund industry and like the previous reports produced by the firm in conjunction with bank of New York Mellon, this one also contains reams of data, charts and thought-provoking brain candy for observers of the alternative investment industry.  It’s definitely worth a read during your evening commute (unless you’re driving, then we suggest waiting until you get home…maybe read it to your kids as a bedtime story).

One of the themes that comes out loud and clear in the report is the continuing dominance of institutional investors.  While this was the result of growing institutional allocations to hedge funds in the 2000-2007 time period, this recent dominance has been thrust upon institutional investors as a result of their loyalty to the asset class.

This chart from the report makes the case in spades:

The majority of the reduction in assets managed by hedge funds over the June ’08-June ’09 period is expected to be from high net worth redemptions, not institutional redemptions.  While institutions are forecast to withdraw some capital from hedge funds, they still represent a growing percentage of all HF investors (AIMA recently put this number at over 50%).

This won’t surprise industry watchers over at Citi Private Bank who study the attitudes of the world’s wealthy.  According to a survey published in The 2009 Wealth Report, most of the planet’s high net worth individuals fled hedge funds in 2008:

Gates no longer “Taboo”

This is an impressive feat for the following reason:  Casey Quirk found that 59% of investors were affected by some form of gating provision last year.  While the firm polled institutional investors, not high net worth investors one might assume both invested in roughly the same funds.

Amazingly, only 7% of those who were caught up in a gate told Casey Quirk they would “never” invest with their manager again.  Fully 43% said they would invest with their manager again since gates were “no longer taboo.”

“Enthusiastic” over Hedge Fund Replication

As we wrote in February, hedge fund replication hasn’t faded away entirely.  While these products have fallen off the media radar screens, they remain of interest to institutional investors.  While half of respondents were still “skeptical” of the concept, a whopping said they were “enthusiastic” of about hedge fund replication.

This roughly matches the results from our survey in early 2008 that showed 28% had either invested or were planning to invest in alternative beta products during 2008:

The “New Active Management”

There’s plenty more in the report.  But the conclusion sums things up well by drawing the fundamental link between the hedge fund industry and active management in general:

“We remain optimistic on hedge funds’ future, perhaps because of, and not in spite of, the crisis
and turmoil. The industry’s current trials will, no doubt, result in a dramatic reconfiguration of
the hedge fund and fund of hedge fund landscape, a wrenching process which will hurt competent managers and damage otherwise good businesses.

“However, this process also represents a unique opportunity for this industry to finally mature,
shedding many practices, standards and anachronisms that ultimately hold back hedge funds
and their managers…

“Ultimately, hedge funds have the opportunity to be at the forefront of asset management, and
vie for control of a far greater asset pool than the $2.6 trillion we estimate. This is the really big
prize for hedge funds: if they can get the alignment and business balance right and become fully-fledged asset management companies, this industry will redefine the products and services that characterize ‘active asset management.'”

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