05 December 2011

AIMA: Assessing the assets

One of the most important trends observed over the course of the past decade has been the 'institutionalisation' of the hedge fund industry. This has been reflected in the operational infrastructure developed by managers, the increasing and now majority position of institutional investors among the industry's capital base, and the continuing convergence of investment practices among traditional and alternative asset managers. This movement has had significant implications for hedge fund firms and their investors, influencing policy, regulation, infrastructure and even the investment styles of many managers.

Evidence of how much has changed can be found by looking at the profile of hedge fund investors. 10 years ago, those who typically invested in hedge funds were high net-worth individuals. Currently, investors in hedge funds are, of course, more likely to be institutions, such as public and private sector pension funds, insurance companies, university endowments, charitable foundations and, more recently, sovereign wealth funds. Such institutions now account for an absolute majority of hedge fund assets under management.

This institutionalisation has changed the dynamic of the industry. Hedge funds are now part of the overall asset management industry, and should be viewed as providing an active style of portfolio management, utilising a variety of hedging practices to reduce volatility, protect capital and improve returns. Hedge fund managers provide such investment skills through a variety of legal structures, products and strategies. In addition to a wide range of investment strategies, covering both very liquid and less liquid asset classes, many managers offer long-only actively managed portfolios, attracting existing and new institutional investors. More recently they have also offered Undertakings for Collective Investment in Transferable Securities, exchange-traded funds, and various fund of hedge funds products for institutional and individual investors. This reflects the ongoing convergence of hedge fund and traditional asset management practices.

Many institutional investors have had to embark on a steep learning curve, studying the merits of investing in hedge funds and other alternative investment funds – whether directly or indirectly via a fund of hedge funds. AIMA, seeking to assist with the educational process, in 2007 established the Investor Steering Committee (ISC), whose role is to offer strategic and practical guidance on AIMA's output, including educational, regulatory, tax, sound practices and political developments.

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