Opalesque Industry Update - "Consultants' Views on Hedge Funds, Funds of Funds and '40 Act Funds" profiles the typical consultant, their investor base, asset allocation and views on hedge funds. Specifically, the survey assesses consultants' views on the role of hedge funds in the portfolio, the percentage allocated to hedge funds, criteria in selecting hedge fund managers, views on fees, major concerns about hedge funds as well as the consulting industry today.|
Among the major findings are:
• Over 36% of the consultants view hedge funds very favorably while 23% viewed hedge funds somewhat favorably. Another 18% had somewhat negative views and 23% were neutral.
• The largest percentage of consultants is looking to hedge funds primarily for non-correlated returns (27%). Providing diversification to a traditional portfolio, absolute returns and a more consistent return stream were each cited by 20% of the consultants.
• Of the consultants that provided their specific asset allocation to/recommendation for hedge funds, the average was 36%. The average allocation to/recommendation for funds of funds was 10%.
• Of the strategies asked about, 64% of the consultants highlighted equity long/short as a strategy they currently allocate to/recommend. Meanwhile, 59% cited global macro and 50% pointed to multi-strategy.
• On average, the typical consulting firm has 26 hedge fund managers on its approved list.
• The surveyed consultants said the top criteria in selecting a hedge fund manager is investment approach (23%), followed by performance (18%) and experience (18%).
• Consultants' biggest concern with hedge funds is mediocre managers (18%).
Large versus small consultants
Lois Peltz, president and founder of Infovest21, noted differences exist between small consultants (those with less than $1 billion in assets under advisement) and large consultants (those with more than $1 billion in assets under advisement) when it comes to their experiences with and perceptions of hedge funds. While the sample size is too small to be representative in some cases, the information is useful. Some examples she cited include:
• Most large consultants have a neutral opinion on hedge funds while smaller consultants are more opinionated. One-third of the small consultants view hedge funds very favorably while one-third view them somewhat negatively.
• Large consultants look to hedge funds to fulfill various functions e.g. portfolio diversifier, provider of absolute return and provider of risk return while small consultants emphasize the non correlation feature.
• Large consultants view their experience as their most important characteristic. The small consultants highlighted their research in alternatives as their distinguishing characteristic.
• Whereas pensions comprised 41% of smaller consultants' investors, that segment comprised over one-half of the larger consultants' investor base. High net worth/family offices comprised the second largest investor group for smaller consultants. Endowments were the second largest group for the large consultants.
• Large consultants perceive funds of funds less favorably than the smaller consultants.
• Smaller consultants perceive '40 Act funds less favorably than larger consultants.
• Smaller consultants are more concerned about hedge fund fees than larger consultants. Larger consultants are more concerned about regulation and damaged relationships between investors and managers.
Infovest21 interviewed 25 consultants during the third quarter of 2013. Surveys were conducted by telephone and email.
Infovest21, founded in 2000, is an information provider to hedge fund investors, managers, funds of funds and service providers. Led by Lois Peltz, president, the firm provides news, research, surveys, white papers as well as organizes seminars and conferences. www.infovest21.com