Hedge Funds and Institutional Investors
Investors are more and more concerned about the diverse risks of hedge fund investments that are unknown to them. The risk is enhanced in the minds of investors by this lack of independent risk management, low transparency and limited liquidity that still characterize most hedge funds today. Many investors continue to view hedge funds as too mysterious, secretive. However, increased interest from institutional investors has led to new demands with more clearly defined independent and greater transparency about performance attribution and higher liquidity due to responsibilities associated with investing their client's money. Several widely publicized hedge fund failures recently have added to investor concerns about extraordinary risk of their hedge fund investments.
The Bank of New York and Casey, Quirke and Associate's report also provides evidence on institutional clients' hedge fund selection criteria. The report posed the question, "what are the most critical factors in selecting a hedge fund and/or fund of hedge fund?" The majority of respondents cited understanding and validating the sources of an investment manager's returns as the most important selection criteria. The performance track record came second to this.
The way funds perform will be a clear signal to informed buyers whether the approach is being faithfully implemented. Managers need to fully understand their performance attribution and use this to substantiate investment decisions and investment beliefs.
Performance attribution systems provide feedback to the organization, give support to sales and marketing, more fully describe the risk levels in a portfolio and improve the level of service given to its customers.
Hedge funds are increasingly popular among a new type of client – the institutional pension funds and fund of hedge fund providers. This trend is likely to continue. Substantial assets are available for those managers who can adapt to institutional clients' requirements.
SS&C's best integrated performance and attribution solution, Sylvan, supports multiple attribution methodologies such as: Arithmetic and/or geometric attribution, single currency and/or multi-currency attribution, top-down and/or bottom-up attribution, cascading and/or non-cascading attribution, carve-out attribution, equity attribution models and fixed income attribution models.