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European Pensions Trust, but Verify by Charlotte Rivington
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European Pensions Trust, but Verify |
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Finance & Investment
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In March, professional services firm KPMG released The Evolution of an Industry, a report that outlined the extent to which institutional investment had entered the hedge fund space and the resultant changes in transparency and due diligence it had brought with it. Those changes, the report outlined, were not just wide but deep. The Evolution of an Industry offered this summation: "As the survey data bears out, we are witnessing a significant shift in the types of investors who invest in hedge funds. Today, investors in hedge funds are much more likely to be institutions, such as charitable foundations, public and private sector pension funds, insurance companies, university endowments, and the like." This sea-change is a new development, say the authors, who trace it back to the economic crisis. Their message is clear: the storm that blew across the financial market did more than rattle the trees; it changed the entire landscape. Where the majority of pre-crisis capital had come from high-net worth individuals and family allocations hedge funds, now institutional investors have become the sector's top allocators. This assertion is supported by the survey that forms the basis for the report's findings. When the data was collated, 76 per cent of all survey respondents reported an increase in pension fund assets over the last four years. Additionally, 70 per cent said they had seen, since the credit crunch, an increase in 'other institutional' assets. A demographic change such as this has its consequences. Here, institutional investors have brought with them a greater appetite for, and higher standards of, transparency and due diligence. This, The Evolution of an Industry states, has led to "the industry […] becoming more 'institutionalised' not only in terms of assets under management but also in terms of its own operational infrastructure." The report clarifies the word 'institutionalised' as: "Because institutional investors are extremely demanding in terms of due diligence, they require robust operational infrastructure in the managers they allocate to, so managers have responded by strengthening their own infrastructure. And because these institutional investors seek increased transparency, managers have increased their capacity to provide that too." "If you look at assets between 2007 and 2012," says InfraHedge's CEO Akshaya Bhargava, "the numbers are similar but the underlying demographics have changed dramatically. Because of that, there's been a very significant impact on behaviour. Most of the buyers are institutional investors so their collective criteria has changed towards greater due diligence and transparency, better control over assets, and more stringent requirements on how the investment is managed." CQS's head of institutional Peter Warren acknowledges the change in the industry. He says: "There is this Lenin quote that Reagan appropriated: 'Trust, but verify.' I think any high quality hedge fund investor has switched to this. Investors look to partner with and invest in organisations they respect and trust but they absolutely expect to verify what they're trusting people about. And it's that partnership which is key as the days when it was a bit of a 'trust me' trade have clearly gone." Warren further outlines his thoughts on the causes of this sea-change, arguing that the global financial crisis was one of what he refers to as 'two inflection points' that sent the industry down this path. Post-crisis, he says, "some investors felt they had not understood what investments they held or owned, or what those investments did. And the Madoff affair drew attention to the whole hedge fund space, and made people more inclined to be distrustful of organisations that didn't have high degrees of disclosure, and couldn't face, or participate in, a detailed due diligence process." In fact, says Cheyne Capital's president Stuart Fiertz, the industry had already taken steps to address the issue of good governance. In 2007, the hedge fund working group was established under the remit of developing standards for the industry. This led to the formation in 2008 of the Hedge Funds Standard Board. It was, says Fiertz, in response to political pressure and a need to address the needs of investors that the board was formed to promote integrity, transparency, and good governance. Find out more about Cheyne Capital or read the full article here
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