Portfolio Partnership and Due Diligence (State Street)

January 2012

KEYWORDS: Institutional Investors, Fund of Funds, assets under management, AUM, Equity markets, Volatility, Preqin, alternative investment, fees, strategy, portfolio diversification, risk management, pensions, Liquidity, bid-ask spread, transparency, Hedge Fund Performance, Hedge Fund Managers, due diligence

Authors:

Jim Tomeo

Organizations:
  • State Street

Summary:

Amid record low interest rates, volatile equity markets, unprecedented correlation between asset markets and strained liability models, investors need the less-correlated, risk-managed returns that hedge funds are known for.  As hedge fund assets under management recovered to a record $2 trillion in assets under management in 2011, these investors have directed new flows to large, well-established hedge funds with considerable client-service infrastructure.

Only the most sophisticated institutional investors possess the in-house expertise and inclination to undertake the necessary manager searches, due diligence and monitoring of direct hedge fund investment. This Vision Capital Insights paper examines how funds of hedge funds (FoHFs) help the broader community of institutional investors to find new hedge funds, quantify the risk-adjusted value of their investment returns and manage the correlation of hedge fund allocations with other investments.

Today, leading FoHFs serve as portfolio advisory partners for institutional investors, delivering a suite of high value-added services focused on macro-economic and macro-financial analysis, asset allocation and monitoring, portfolio construction and the sourcing and selection of managers. FoHF management is a financial discipline as complex as portfolio management itself. As the universe of investors and managers continues to expand and as hedge fund volumes steadily increase, complexity rises exponentially, creating substantial opportunities for leading FoHF managers.

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