07.29.2011
By Terry Flanagan

The New Hedge Fund Era

This year, the hedge fund industry is expected to attract $210 billion in new money, according to Deutsche Bank’s 9th alternative investment survey. Assessed by 530 investors, many of the new assets are coming from institutions. The survey confirms that the expected rate of hedge fund assets is four times of last year’s total assets—at 2.25 trillion in assets, a long way from 1.9 trillion in 2008

“Sixty-five percent of respondents say they’re now expecting to put money into hedge funds with less than one billion,” said Jack Wiener, executive vice president at solutions provider, Linedata North America. “These firms are willing to get smaller hedge funds a chance.”

Hedge funds today know to be organized.

“Whether you’re launching a pizzeria, bar or hedge fund, your business plan needs to show how you will communicate transparency,” said Art Murphy, vice president of hedge fund at Linedata. “What drives transparency is seamless connectivity of front, middle, and back office.”

Such connectivity relies on the strength of a fund’s counterparties: vendors, lawyers, and especially, administrators.

“Administrators can add value because they are involved with fund cash management; they now initiate a buyer of payments,” said Kristin Steele, head of marketing and business development at ISIS Fund Services USA. “Funds need a dual role of cash management, and strong infrastructure.”

One area Steele highlighted is the role of the third party evaluator. ‘

“For hard to value securities, such as private equity, managers and administrators need to have a good relationship. They need to work together to look at internal pricing models, get those good prices from a custodian and more importantly, properly document reasons behind the prices,” she said.

Hedge funds walk a fine line between meeting investor demands, and managing them, according to Wiener. Increased costs and awareness of installing a proper team are essential as managers compete for business—and it can be overwhelming for managers whose traditional role has been to manage money.

“Investors want to know how you deploy resources; they want to know their money is safe,” said Irwin Latner, partner of the hedge fund group at Herrick, Feinstein LLP.

Hedge funds are no longer just trading desks, according to Murphy, and investors are no longer blithely trusting.

“Compared to five years ago, investors now are much more knowledgeable,” said Chris Grandi, president of Abacus Group, a hedge fund solutions provider.

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