The post-2008 influx of institutional money into hedge funds has resulted in a marked increase in the global industry’s operational sophistication and transparency to investors. This is the gospel according to a new report by KPMG, an international network of audit, tax and advisory firms, and the Alternative Investment Management Association (AIMA), the global hedge fund association.
The report, entitled The Evolution of an Industry, is based on a survey of and in-depth interviews of 150 hedge fund management firms globally with more than $550bn in combined assets under management. It found that hedge fund management firms have increased their operational infrastructure in areas like investor transparency and regulatory compliance as allocations from institutional investors have increased.
76% of respondents have observed an increase in investment by pension funds since 2008, while institutional investors as a whole, including funds of funds, accounted for a clear majority (57%) of assets under management.
The report finds that the increase in institutional investment has led to more thorough due diligence and greater demands by investors for transparency, with 90% of respondents reporting an increased demand for due diligence since 2008.
84% of all respondents indicated they had increased transparency to investors since 2008, which is reflected by the fact that the majority of firms have taken on multiple members of staff to respond to these increased investor demands. The report also found that hedge fund management firms had almost universally increased investment in regulatory compliance since 2008, with 98% of firms hiring additional staff in this area.
“Institutionalisation has been described as the continuing inflow of new institutional capital into the industry, but as this report demonstrates, it is also about the increasing sophistication of operational infrastructure with respect to transparency, compliance and due diligence,” said Andrew Baker, AIMA’s CEO.
Mikael Johnson, lead partner for alternative investments at KPMG in the U.S. said: “Institutions clearly understand the value that hedge funds offer, as evidenced by the record amount of assets they have allocated to these funds. At the same time however, this report shows that investors are signaling that hedge funds need to maintain the same institutional-grade controls as are evident in the investors’ own organisations.”
The new report is the second of a two-part series by AIMA and KPMG on the state of the global hedge fund industry. The first, published in April, looked at hedge fund industry performance, risk and volatility.
Robert Mirsky, lead partner for hedge funds at KPMG in the UK, commented: “The combination of an increase in regulation, the changing nature of the investor base, and the natural evolution of the business has made the industry nearly unrecognisable from only five years ago.”