By: Hung Tran, MARHedge
Published: May 9, 2006

MARHedge’s 12th Annual Mid-Year Institutional Investment Conference yielded the usual discussion about how the hedge fund industry is being “institutionalized” (or was it how investors should ”institutionalize” there hedge fund managers…one or the other, I wasn’t there).  

In any case, according to MARHedge, hedge fund managers were excited about the opportunity to be “institutionalized”.  But opinions on portable alpha were mixed.  Jack Swan, senior product manager at Lighthouse Investment Partners, a fund of hedge funds was decidedly pragmatic:

“We hear a lot of talk about portable alpha, but see far less in terms of execution.”

Gustavo Dominquez, managing director at Gottex Fund Management, highlighted the operational challenges of creating a portable alpha program.

“The platform needed to execute a portable alpha mandate takes time and it has been very laborious…”

These cautionary notes have also surfaced elsewhere in this blog.

The full MARHedge article follows below (with permission from our friends at MARHedge)…

Institutional investors have their own needs and concerns when it comes to investing with hedge fund managers. In a session entitled Catering to Institutions Evolving Concerns at the MARHedge 12th Annual Mid-Year Institutional Investment Conference in San Francicso, a panel of funds of funds and single-fund managers tried to get a pulse of the institutional investor market.

Institutional investors have become more savvy in their hedge fund risk and return profiles, and are looking for alpha in different corners of the market, panelists said. “Investors are looking for more focused products, such as asset-based lending and Asia-focused funds, because of their better understanding of the industry and strategies,” said Gustavo Dominquez, managing director at Gottex Fund Management Ltd, a global fund-of-funds firm.

Ashbel Williams, managing director and head of investor relations at New York-based Fir Tree Partner, a value-oriented hedge fund managing more than $2.5 billion in assets, said institutional investors are taking a more measured approach in their investments.

“We’re seeing more institutions and funds of funds looking at taking longer lockups as a way to find premium in a less liquid, longer-term strategy,” said Williams. “Endowments and family offices are more patient, they’re distinguishing between alpha and beta, and they’re willing to take the steps to achieve alpha.”

Institutional investors’ interest in hedge funds have forced managers to be more transparent and focused in their practices, said Jack Swan, senior product manager at Lighthouse Investment Partners LLC, a Palm Beach Gardens, Florida-based fund of funds operation.

“The net effect of larger institutional flow into the industry has been positive; it has crystallized where funds of funds need to be delivering returns and has forced better communications between investors and fund managers resulting in a better understanding of what the managers are doing on a day-to-day basis,” said Swan.

Interest in portable alpha products among institutional investors seems to be picking up steam, according to panelists. Dominquez said that his firm “is very close” to finalizing two portable alpha mandates for institutional investors, but that the process has not been an easy one.

“The platform needed to execute a portable alpha mandate takes time and it has been very laborious,” he said.

Swan took a less bullish view. “We hear a lot of talk about portable alpha, but see far less in terms of execution.”

So with more institutional capital flowing into the hedge fund space, are firms’ product lines driven by demand or are investors still flocking only to their flagship funds? Panelists said both elements are in play. “Both things are taking place, and we have to listen to the smart money,” said Dominquez. “The broken clock is right two times a day, so we’ve become more flexible and have opened our ears to investors.”

Fir Tree Partners’ Williams said that although his firm’s investors are happy with its current products, some investors are inquiring about side-pocket investment opportunities, while others are asking about a concentrated “best ideas” fund that would provide higher returns, albeit with more volatility.

Swan urged managers to “listen to your investors and understand where they’re coming from with respect of that reach for returns.”