Investors adopting partnership-driven approach to hedge funds, says Barclays study

Prime Brokerage
26 Jun, 2014

Investors are concentrating their hedge fund portfolios on fewer managers and adopting a more partnership-driven approach, according to a study by Barclays Prime Services and the Alternative Investment Management Association (AIMA), the hedge fund industry body.

The study – The Extra Mile: Partnerships between Hedge Funds and Investors – found nearly half of investors surveyed planned to grow their allocations into hedge funds via customised mandates in 2014. In 2013, just 6% of investors allocated capital into hedge funds through customised mandates. This can include managed accounts or funds of one, which offer investors better transparency, enhanced control over their assets and mitigation against co-investor risks.

Another mechanism for partnerships is through co-investing whereby allocators and their hedge funds join forces on opportunistic investments that might not fit into a co-mingled vehicle. Many of these investments are longer-term and illiquid and are more akin to private equity funds. While these investments were not particularly popular among investors in the aftermath of the financial crisis, clients are warming to them now. 

A growing band of investors are acquiring equity stakes in managers to bring about further alignments of interests. “As a general rule, assuming the hedge fund has moderately strong performance and is able to grow its Assets under Management (AuM) over time, buying an equity stake in the general partner (GP) on top of making a limited partner (LP) investment will likely return better economics than having an LP investment alone,” read the Barclays study.

“The core benefits of partnerships are that they provide managers with stickier capital and investors with a solutions based approach from their managers, increased knowledge and understanding of the hedge funds they are invested with, and greater value for money. These partnerships can often enable investors to leverage the skillsets of hedge fund managers to address their investment needs, rather than simply investing in a set range of products,” said Ermanno Dal Pont, head of capital solutions for Europe, Middle East and Africa (EMEA) at Barclays Prime Services in London.

The bulk of investors going down this route tend to be institutional. “Investors asking for partnerships are generally but not exclusively institutional. Firms writing big tickets such as pension plans and sovereign wealth funds (SWFs) are most likely to be able to enter into these arrangements. However, we do see family offices and funds of hedge funds doing this too,” said Dal Pont.

Barclays Prime Services surveyed 30 investors with more than $2 trillion in assets and 20 hedge funds with a collective AuM of $270 billion. 

BarclaysAIMApension fundssovereign wealth funds