EUROPE - Fund managers are showing an appetite for a hybrid hedge fund product that could appeal more strongly to pension funds, new research has revealed.
The report Hedging Your Bets – Mixing long-only with long-short investment by Investit Intelligence looked into the operational efficiencies of setting up and running a hedge fund in an existing long-only or “mixed” fund management firm and took in fund managers representing more than 40% of mixed-environment hedge funds, administrators, prime brokers, pension consultants and fund of hedge fund managers in Europe.
The research revealed the possibility for the market to split to support a less constrained but still risk-and-fee-aware hedge fund product for pension funds.
“What we found suggests that a future two-tier hedge fund world will emerge,” said Catherine Doherty, principal at Investit and coordinator of the Investit Intelligence service.
“A world where the ‘original’ hedge product continues to flourish without constraints while a new product enters – a hybrid child of hedge funds and long-only management using hedge fund techniques while providing the security which pension funds require.
“This hybrid is attractive to both managers and clients, and we believe we will see this model becoming established over the next three years.”
The report noted that a hybrid product could provide the “operational reassurance” needed to get over the ‘headline risk’ that many institutional investors cite as a barrier to investing in hedge funds.
“This type of product may also offer a more attractive option for fund managers wanting to use hedge fund techniques without the brand risk which a wholesale entry into hedge funds could bring,” Investit said.
The key factors defining the emerging hybrid hedge fund product were found to be: product performance benefits from the relaxation of investment constraints; a pension fund-specific product would not require an offshore structure so could still benefit from the regulatory environment already in place for the long-only funds; managers can generate an income stream more strongly linked to their success as investors; additional income from performance fees.
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