And institutions said cut fees, be more risk averse and be transparent. And hedge funds listened…

And the institutions said unto the hedge funds: Cut down your fees, provide more transparency and make risk management a key priority, and we will give you money.

And the hedge funds made it so. And the institutions gave them more money.

While not quite on par with God’s messaging to Moses (or Mel Brooks’s infamous “15, Oy! 10, 10 commandments!” scene in History of the World Part I), the collective response to institutional investors’ demands that hedge funds get their act together in the post-2008 financial world is being acted upon in spades, showing up in the amount of cash flowing into hedge funds’ coffers.

According to research firm Preqin’s latest Hedge Fund Spotlight released this month (click here to download the PDF), capital sourced from institutional investors has grown to 61% of hedge fund assets from about 45% in 2008. Meanwhile, nearly half of the survey respondents said the fact that institutions had invested more money had caused them to put in place tougher risk management controls.

The report, which surveyed 60 hedge funds that collectively manage $95 billion in assets, found that 42% also said the rising institutional base of clients has led to a reduction in the fees they charged on their funds, while 21% of hedge funds surveyed have introduced commingled funds as a way to attract or maintain institutional interest.

And nearly 85% said they expect an increase in the proportion of their assets coming from institutional investors over the 12 – 18 months. (See chart below.)

The hedge funds certainly listened.

It’s part of a broader transition that the industry has been collectively making over the past few years. The change comes partly at the behest of poor returns and institutional investor disenchantment and partly thanks to existing and pending regulatory oversight prompting hedge funds to start acting more like mutual funds and other pooled investments that share more and charge less.

Even so, not all hedge funds are willing to open the kimono completely: Only 15% of those surveyed said they expect to launch a UCITS-structured hedge fund, even though institutional investors continue to be attracted to their structure and openness.

“UCITS wrappers have traditionally catered for the retail market but institutional investors are increasingly turning to these funds in order to tap into the transparency and liquidity which are at the forefront of their demands from their hedge funds managers in this post-downturn era,” noted the report.

Preqin also highlighted that smaller funds received less capital from institutional investors, with 70% of the respondents saying their biggest challenge in raising institutional capital was overcoming the requirement that funds maintain a minimum level of assets under management.

To be sure, at least one hedge fund has been publicly outed for doing what Preqin’s survey suggests: succumbing to what investors want. Hedge fund giant D.E. Shaw this week reportedly cut its fees to investors.

In the end, God told Moses to lay his stick down on the ground – and he turned it into a serpent. Let’s hope the institutional world’s proverbially similar edict doesn’t lead to serpents biting anyone in the you-know-what or, in tribute to Mel Brooks, another fumbling of the commandments. Thou shall provide full transparency and liquidity!

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