Pension funds and endowments are sending hedge fund managers a friendly message — let us sit in the front seat with you, please.
As hedge funds take on a growing role in institutional investment portfolios, large investors, including the California Public Employees Retirement Scheme (Calpers) and the British Airways Pension Investment Management, have written a guide to help managers better understand exactly what they want.
“If it is our capital, we should have more of a voice in how it is managed and to be able to take control of our assets when we deem it necessary,” said Kurt Silberstein, a senior portfolio manager at Calpers.
With $233 billion in assets, Calpers is the largest public pension fund and was one of the first to make bets on hedge funds. It now has $5.5 billion invested with hedge funds.
The 42-page long guide, which is being published by the London-based Alternative Investment Management Association, offers detailed suggestions ranging from the size of a fund’s board — no less than three — to the timing of hedge fund reports — no less than once a month.
In sections entitled governance, risk, investments, capital and operations, the authors share their preferences for seeing how risk is measured; that the investment terms are fair and reasonable; and that board meetings are held at least quarterly.
The report comes three years after the worst financial crisis in recent memory as hedge funds rebound from 2008’s deep losses and 2010’s tepid returns, with hopes of finding a better investment environment ahead.
It also comes as a tougher regulatory environment is expected to take hold of an industry that had long been called secretive and loosely regulated.
But the guide’s authors said their suggestions differ significantly from the regulatory agendas of governments. The authors wrote that calls from investors might “have a greater influence on how the industry, investors and managers operate going forward.”
Hedge fund managers in the $2 trillion industry have already acknowledged the importance of pension fund and endowment money.
In a recent survey from accounting and audit firm Rothstein Kass, some 71 per cent of the respondents said institutional managers are likely to provide the bulk of money and be more powerful in forcing concessions from managers.
“Institutional investors are more needy,” Calpers’ Silberstein said, adding: “We require more information, more reporting and more transparency.”