Hedge funds and mutual funds are looking more and more alike — a trend I’ve dubbed “the great convergence.” Mutual funds are adopting alternative investment approaches while hedge funds are being subjected to a higher level of regulation.
A recent NICSA webinar, “Impact of Increasing Allocations from Institutional Investors and Public Funds,” reviewed some of the implications of this convergence from a hedge fund perspective. Panelists from BNP Paribas, Ernst & Young and Tannenbaum Helpern Syracuse & Hirschtritt discussed how hedge fund operations have changed as their investor base has expanded beyond high net worth individuals.
Here are 5 ways that hedge funds are looking more like mutual funds:
- They’re creating separate classes of investment for different investor types. Investments from pension plans may be directed into a separate fund, to avoid having to assume ERISA fiduciary liability for all fund investors.
- They’re monitoring dispersion of returns across those classes. If performance of the “pension plan fund” lags that of the “high net worth individual fund,” institutional investors will want to know why.
- They’re responding to detailed questionnaires about their operational risk. Institutional investors want to understand the control environment at the hedge fund and its service providers, to protect their assets against loss through fraud.
- They’re hiring third parties to value fund investments. Portfolio manager-produced valuations are sufficiently independent for institutional investors.
- They’re providing greater transparency to investors. Hedge funds are reporting to investors more frequently — maybe even providing daily valuations — and in more detail.
Want to learn more? An archive of the webinar is available on the NICSA website and is available free to NICSA members. You need to be logged into the NICSA website for access. Contact our office at firstname.lastname@example.org or 508-485-1500 to set up an account.
Previous blog posts on the convergence between mutual funds and hedge funds: