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Fifth Annual Cass-Capco Risk Management Conference
April 19, 2012: Cass Business School, London, UK

The fifth annual conference of the Cass-Capco Institute on Risk brought together practitioners and academics to discuss how risk can be managed to lessen its impact on business and economic growth... Read More

Banking in the “Glocal” World
March 1, 2012: Zurich, Switzerland

Swiss Finance Institute and Capco Institute were pleased to present the Inaugural Annual conference of the SFI-Capco Institute Paper Series on Banking in Zurich, Switzerland. The conference brought together leading financial experts and scholars to discuss... Read More

Hedge Funds: What do Institutional Investors Really Want?

The hedge fund industry is going through a major shift. There is a seemingly endless stream of new regulations. Compliance and its impacts have taken the lion’s share of commentators’ and analysts’ attention. Now, the industry needs to refocus urgently on the most important players in the whole equation … the investors themselves.

No longer focused exclusively on returns, the investor community is increasingly sophisticated and demands a number of key elements in addition to performance. So what is it that investors want? This Capco paper looks beyond the issue of absolute returns, to consider today’s real investor requirements. Informed by our own original research, we examine some key behaviors, to understand just why it is that institutional investors select one fund over another.

The investment market will continue to look for the individual strategic insight and tactical flair that distinguishes the best fund managers. Investors will no longer accept short-term returns as a substitute for longer-term stability, operational transparency and fundamental good management.

There has been some very good research done so far into the hedge fund regulatory environment. It has not been designed to focus on investors: the most important players in the equation. But if the funds want investment – and they do – this imbalance of attention has to change.

For a fund manager, regulations and compliance are a cost of doing business. That cost has risen and has been a recent preoccupation. But the fund manager’s natural long-term focus tends to dwell on returns. Of course, returns make the headlines. However, in reality it is the assets under management (AUM) that are really king. To paraphrase the K.I.S.S. principle, it’s the AUM, stupid!

Given that the industry’s traditional 2+20 model still prevails, that 2% enables (or should enable) the management company to fund a number of key activities, including:

infrastructure upgrades to accommodate an increasingly complex regulatory environment
marketing/investor relations
operations, technology, control and support functions
working capital to launch new funds

Investors have matured and moved on from an exclusive returns focus. Increasingly sophisticated, they demand a number of key elements besides performance.

So what is it that investors really want? In this paper we look beyond absolute returns. We consider real investor requirements and behaviors in today’s market, to understand just why it is that institutional investors select one fund over another.