Hedge funds have been through the ringer since the start of the financial crisis. A slew of them blew up when the markets turned sour, and the whole industry got a bad rap because of people like Bernie Madoff.
But those aren’t the only major changes. There’s also been a big shift in who backs these funds. No longer are they propped up by high-net-worth individuals and family offices. Now they’re supported by big institutional money – which may surprise you, given the losses many of these funds suffered.
According to a report from the Alternative Investment Management Association and KPMG, 57 per cent of the global industry’s assets under management now come from institutions such as charitable foundations, public and private sector pension funds, insurance companies and university endowments.
This shift is part of what the report calls the “institutionalization” of the industry. On top of a bigger dependence on institutional money, this trend also includes the transformation of hedge funds from small, nimble organizations to much more bureaucratic institutions.
That’s not necessarily a bad thing. Much of the institutionalization has come to areas like the back office, where employees are being hired to beef up such things as regulatory compliance and due diligence. But for the funds themselves, it undoubtedly leads to higher costs.
The 150 funds surveyed also said that their investors now demand better investor relations and much more transparency, both of which require extra manpower. Much of the reason that these demands have grown louder is that institutions aren’t as patient as family money.
As for the future, the majority of firms expect downward pressure on fees, and they wouldn’t be surprised to see consolidation because tougher regulation and institutionalization will force smaller firms to pair up.