New Managers September 2012

Focus - Should emerging managers go to investment consultants?

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Should emerging managers go to investment consultants?

As long as there is a need for expertise in any industry, there will be expert consultants offering their knowledge and services. The hedge fund industry is no different. Hedge fund consultants service hedge funds with their know-how and network - be it in investment strategy, research or marketing.

Investment consultants, which are the focus of this article, help investors, particularly institutional investors with their hedge fund allocations. Those consultants are gaining more cachet in the industry and are often directly competing with funds of hedge funds.

According a Citi Finance's survey published in June 2012, titled Institutional Investment in Hedge Funds: Evolving Investor Portfolio Construction Drives Product Convergence, global assets invested with hedge fund firms could rise from today's $2.1 trillion to more than $5 trillion as a result of two emerging trends. Firstly, institutional investors may add $1 trillion to protect against risks and get more diversification; secondly, as there may be a "convergence zone" between hedge funds and traditional assets, an additional $2 trillion could come into the hedge fund industry in the form of regulated alternatives and long-only products.

The Citi survey also observes a trend among intermediaries, such as consultants and funds of funds, in which there is also convergence.

The number of hedge funds grew by 66% from 2003 and 2007 (4,598 to 7,637), and the number of "fund of fund intermediaries" (funds of hedge funds or FoHFs), grew by 251% in this period - from 781 to 2,462 (Source: HFR). During those years, says the Citi survey, FoHFs were the primary conduit through which many institutional investors channell......................

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This article was published in Opalesque's New Managers a top-down monthly analysis, news and research publication on the global emerging manager space.