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Know Your Advisors: Vital Considerations for Investors and Hedge Fund Managers

by Amy Bensted

  • 06 Jul 2009
  • HF

With more than 57% of the institutional investors listed on the Preqin Hedge Fund Investor database using advisors to assist with their hedge fund investments, it is clear that investment consultants are of vital importance to the alternative investment world.

Institutional investors (excluding fund of hedge funds) using an advisor have a higher allocation to hedge funds, at an average of 11.8% of total assets, compared to investors that make all investment decisions in-house, which have an average allocation of 9.6%. Following the tumult of 2008, many advisory firms recommended that their clients put some of their investments in alternatives – including hedge funds – on ice until greater stability returned to the global markets. However, Q2 2009 has marked a turning point for many hedge funds, with not only positive returns being posted by many funds in the past few months, but some vehicles generating record breaking performance. As a result advisors that were wary of allocating new capital to the asset class towards the end of last year are once again recommending hedge funds as a tool to reduce portfolio volatility. Watson Wyatt Investment Consulting is one advisor that recently placed emphasis back on hedge fund investments, when in April it lifted its freeze on hedge fund recommendations that was implemented in 2008. Previously, Watson Wyatt, whose clients have about USD 18 billion invested in the asset class, had deterred its clients from investing in fund of hedge funds and hedge funds but is now recommending direct hedge fund investments, multi-strategy funds, credit strategies and market neutral strategies to all its clients. Mercer Investment Consulting and New England Pension Consultants have followed suit and have recently once again begun advising clients to make new hedge fund investments, albeit with some caution.

As the hedge fund industry continues to recover and confidence returns, the tide is turning in institutional investor sentiment towards hedge funds, and capital is starting to flow back into the hedge fund asset class following the huge losses and redemptions which characterized 2008 and the first months of 2009. It is clear that advisory groups, which influence a large portion of the total institutional investor assets at work in hedge funds, are a key marketing target for those hedge fund managers which are looking to grow assets during the latter half of this year.

For the full report on advisors active in hedge funds, please see Hedge Fund Spotlight June 2009. Click here to register to receive Hedge Fund Spotlight free each month.

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