Hedge Fund Branding Continues to Drive a Majority Of Asset Flows
Since the market correction of 2008, a vast majority of hedge fund net asset flows have gone to a small minority of hedge funds with the strongest brands, marking a change from the pre-2008 environment. A brand is an investor’s perception of the overall quality of a hedge fund based on multiple evaluation factors that evolve over time. A high-quality brand takes a long time to develop, but once achieved, it significantly enhances a firm’s ability to raise capital and retain assets during a drawdown in performance.
Branding is a critical issue for all hedge funds, because the marketplace has become increasingly competitive. Some estimates put the number of hedge funds at over 15,000 in the market place. Hedge fund investors are inundated with requests for meetings, with some receiving hundreds of phone calls or e-mails per week from investment managers. To filter through the overload of information, investors are turning more and more to a firm’s brand when choosing which funds to meet and ultimately invest with.From the 4th quarter of 2008 through the 3rd quarter of 2010, most hedge fund inflows gravitated to the largest hedge funds with assets greater than $5 billion, deep operational infrastructure, large investment teams and an institutional client base. Performance became a secondary consideration. During this period a large percentage of the assets flowing into the hedge fund industry were driven by large pension funds making their first direct allocation to hedge funds. Their primary objective was increasing their exposure to hedge funds while minimizing headline risk. The large hedge funds that had developed well-known brands within the industry were perceived as providing a conservative approach to investing in this space.Over time, the definition of a high-quality brand evolves and a greater emphasis may be placed on potential future performance. As an increased number of pension funds have gained more experience with hedge fund investing, some gradually reduced the minimum size of AUM of hedge funds in which they invest. Most of the assets continue to flow to the largest managers, however many have begun allocating a greater portion of their assets to funds with $1 billion to $5 billion in AUM. Over time we expect this AUM limit to decline, but currently very few pension funds are investing in hedge funds below $500 million in AUM....MORE
