Influx of Institutional Investment in Hedge Funds
Posted by Louie Drake on Thursday, May 7, 2015 Under: Finance
Challenges faced by the financial industry have tipped the table against the heavily regulated mutual fund model and towards the hedge fund model, increasing the need for hedge fund strategy.
Mutual Fund Model Becomes Outdated
The mutual fund model’s strategy is to buy then hold on to investments longer. They take less risks compared to their hedge fund counterparts. This means mutual funds are more vulnerable to the rise and fall of the increasingly unreliable market. Even when a mutual fund makes money in the long term, fees and taxes eventually result to reduced or even lost returns.
Institutional Investors Now Choose Hedge Funds
Institutional investors, such as pension funds, have increasingly been pouring their money into the riskier, but recently proven to be more strategically profitable hedge funds. This is especially true for hedge funds that have a sound investment and risk management strategy, and have demonstrated their skills in raking in risk-generated returns.
Hedge Funds Draw New Talents
Another factor that has contributed to the rising popularity of hedge funds among institutional investors is the talent pool. More and more talented traders have decided to move away from the more conservative mutual fund industry, where their market moves are mostly restricted to buying options.
The Price of Attracting Institutions
Institutional investments now make up more than 70% of most hedge fund capital. There is no denying that this is a very positive development for hedge fund managers. However, this increased flow of investment comes with a price.
Institutional investors are used to a certain level of service and care. They require more disclosure of information. They are not satisfied with the traditional hedge fund approach of keeping their strategy under wraps, but prefer to know exactly how their investments are being traded. Institutional investors also care about consistency of reporting and communication.
As a result, hedge fund companies have been allotting a bigger percentage of their operational budgets on public relations and compliance management, especially the latter. Most hedge funds now reserve 5% to 10% of their operational costs to compliance technology. These systems eat into their profit margins and limit the range of their trading activities.
Adjusting for Growth
With institutional investments amounting to billions, fund managers who wish to become big players in the financial industry must shape their hedge fund and operations strategy in order to keep attracting and retaining their institutional investors.
Mutual Fund Model Becomes Outdated
The mutual fund model’s strategy is to buy then hold on to investments longer. They take less risks compared to their hedge fund counterparts. This means mutual funds are more vulnerable to the rise and fall of the increasingly unreliable market. Even when a mutual fund makes money in the long term, fees and taxes eventually result to reduced or even lost returns.
Institutional Investors Now Choose Hedge Funds
Institutional investors, such as pension funds, have increasingly been pouring their money into the riskier, but recently proven to be more strategically profitable hedge funds. This is especially true for hedge funds that have a sound investment and risk management strategy, and have demonstrated their skills in raking in risk-generated returns.
Hedge Funds Draw New Talents
Another factor that has contributed to the rising popularity of hedge funds among institutional investors is the talent pool. More and more talented traders have decided to move away from the more conservative mutual fund industry, where their market moves are mostly restricted to buying options.
The Price of Attracting Institutions
Institutional investments now make up more than 70% of most hedge fund capital. There is no denying that this is a very positive development for hedge fund managers. However, this increased flow of investment comes with a price.
Institutional investors are used to a certain level of service and care. They require more disclosure of information. They are not satisfied with the traditional hedge fund approach of keeping their strategy under wraps, but prefer to know exactly how their investments are being traded. Institutional investors also care about consistency of reporting and communication.
As a result, hedge fund companies have been allotting a bigger percentage of their operational budgets on public relations and compliance management, especially the latter. Most hedge funds now reserve 5% to 10% of their operational costs to compliance technology. These systems eat into their profit margins and limit the range of their trading activities.
Adjusting for Growth
With institutional investments amounting to billions, fund managers who wish to become big players in the financial industry must shape their hedge fund and operations strategy in order to keep attracting and retaining their institutional investors.
In : Finance
Tags: hedge funds hedge fund manager
