A majority of mid-sized hedge funds do
not have sufficient client service personnel and infrastructure to
compete effectively for institutional capital according to a new study.
The study by Greenwich Associates and McGladrey found a strong link
between the size of a hedge fund's sales and client service teams and
its ability to attract institutional capital.
The study also found hedge funds with an investor to client
service staff ratio of 40:1 or better generally had more success
winning institutional mandates.
Hedge funds with two or more dedicated sales, marketing and investor
relations professionals won 10 mandates on average in the 12 months to
the end of July, compared with seven mandates on average for funds with
fewer salespeople.
The study also found hedge funds with an investor to client service
staff ratio of 40:1 or better generally had more success winning
institutional mandates.
However, only 45% of mid-sized hedge funds have two or more
professionals dedicated to sales, and only 25% of those surveyed
advocate an investor relations coverage ratio of 30:1.
"Hedge funds with $100-$500 million in assets are largely unprepared
for the institutional investor," said Alan Alzfan, a partner at
McGladrey.
"There is a disconnect between the organisational structure of client
service resources in mid-size hedge funds and their aspirations to
attract institutional investors. This segment of the market has to make
a greater investment in the critical areas of sales, investor service
and reporting in order to compete for institutional money," noted Alzfan.
The client base of mid-size funds continues to be dominated by high
net worth investors (89%) and funds of hedge funds (71%), according to
the study.
The study found that around only 50% of hedge funds with $100-$500
million in assets have corporate and public pension plans as clients,
while 35% have won mandates from foundations and endowments.
The report also highlighted the importance of investor reporting
capabilities in winning institutional mandates. Two-thirds of
institutional investors generally expect weekly performance information,
compared to one-third of high net worth investors.
The ability to deliver automated performance and risk reports to
investors can help clinch an institutional mandate. Less than 10% of
mid-size hedge funds have these capabilities, according to Alzfan.
Hedge funds with over $5 billion in assets continue to attract the
lion's share of investor capital. These managers accounted for around
75% of inflows in the third quarter and currently control around 60% of
total industry capital, according to Hedge Fund Research.
Hedge funds with less than $500 million – 75% of all managers –
control less than 10% of total industry assets.
The findings of the Greenwich/McGladrey report are based on
interviews with 52 hedge funds with $100-$500 million in assets under
management.
