As institutional investors have become more developed and knowledgeable with regards to the hedge fund universe, their requirements from their portfolios have evolved accordingly. Before the financial crisis many institutional investors’ primary goal was to maintain a hedge fund portfolio that outperformed the S&P Index. However, in the present day investors are more astute than before and are demanding transparency, control, and most importantly, downside protection from their hedge fund investments. To achieve this, there has been a growing interest in managed accounts and ‘fund of one’ structures, which allow institutions to have the greater control and transparency that they require from their hedge fund investments.
Over the last few years, Preqin has seen a noted increase in the interest in commingled direct vehicles coupled with a corresponding decrease in demand for commingled funds of hedge funds, partly in a bid to reduce fees. Looking recently, the proportion of institutional investors initiating searches for commingled funds of hedge funds fell by seven percentage points between Q4 2013 and Q1 2014. However, it has been the case that many investors simply do not have the resources at their disposal to manage a portfolio of direct hedge fund investments. This is why managed accounts and fund of one vehicles have become an attractive ‘middle ground’ between the two structures.
Preqin’s Hedge Fund Investor Profiles online service currently tracks 439 institutional investors with a preference for managed accounts, and within this, 117 that have a specific preference for managed account funds of hedge funds. In terms of the make-up of these investors, almost one third (31%) are public pension funds, and one fifth are private sector pension funds. Geographically, the majority of investors (54%) with a preference for managed account funds of hedge funds are based in North America, with 27% based in Europe and 19% based in Asia-Pacific and Rest of World.
Pension funds, public and private sector, are prime examples of the type of established and knowledgeable investor groups that are likely to seek managed accounts and fund of one structures. These investors also represent a significant amount of capital invested in the hedge fund space overall, with these groups representing approximately 40% of all capital invested in hedge funds by institutional investors. Therefore, it is likely that we will see a significant portion of capital allocated towards managed accounts in the future. Some examples of public pension funds that are already targeting managed account vehicles are MassPRIM and New York State Insurance Fund. The former issued an RFP at the beginning of Q1 2014 for a managed account fund of hedge funds manager and the latter issued an RFP earlier this month searching for either a managed account fund of hedge funds manager or a fund of one manager to run a $200mn mandate.