Reinvention in the Hedge Fund Industry

State Street Corporation released a new Vision Report today, entitled “Hedge Funds: Rebuilding on a New Foundation.” The report examines the re-emergence of the hedge fund industry and the new dynamic between investors, hedge funds, and hedge fund administrators that has emerged to address sweeping regulatory changes and investor demands for enhanced fund transparency, liquidity and efficiency.

According to State Street’s Vision paper, today’s post-crisis environment fund selection will emphasize six critical operational and risk management elements: investment strategy and performance, portfolio liquidity, portfolio transparency, reconsideration of pricing and lockup periods, operational due diligence and the independence of custodians and administrators.

“The theme of transparency in the hedge fund and fund of hedge funds market continues to grow,” said Jim Tomeo, chief operating officer and senior portfolio manager at SSARIS Advisors, LLC, an affiliate of State Street Global Advisors. “Across the alternative investment industry, institutional investors are driving the evolution of all investment channels, from direct hedge fund investment, funds of funds, to managed accounts and other structures. Improved investor sentiment and positive inflows suggest reviving confidence across the board.”

“Institutional investors are increasingly taking great interest in how hedge funds manage operational infrastructure, choose administrators and provide for governance and best practices,” said George Sullivan, executive vice president and head of State Street’s alternative investment solutions group. “Escalating client demand for operational control and transparency is driving funds to outsource many responsibilities to administrators experienced in all asset types and investment strategies. By hiring administrators to assume a range of services, including data management, asset class coverage and portfolio risk analysis, fund managers can concentrate on generating alpha and distributing investment products.”