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Becoming Bespoke: Changing Hedge Fund Terms
Becoming Bespoke: Changing Hedge Fund Terms

Becoming Bespoke: Changing Hedge Fund Terms


Caleb Wong

Caleb Wong

Head of Alternatives, Asia-Pacific

BNP Paribas Securities Services

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Interest in custom-made structures is driving hedge fund managers to adapt their offerings. BNP Paribas Securities Services’ Caleb Wong explains.

AsiaHedge: Investors are asking for more ‘customisation’ in fund terms: what areas are receiving most attention?

Caleb Wong: There are a number of reasons why investors are seeking customisation, but it largely boils down to three main areas – fees, liquidity, and transparency. As opposed to terms offered by a hedge fund manager’s boilerplate structures, a tailor-made portfolio offers investors better alignment in terms of their unique investment objectives and risk profile. As this gains momentum, the more we will see the market naturally gravitate away from the status quo – as evidenced by the gradual erosion of the traditional “two-and twenty” fee structure. Today’s allocators are also keen to play a more active role in portfolio construction and want to have greater control in managing their liquidity.

Lastly, transparency is another area which investors are focusing on. Investors want as much detailed data as possible to manage risk and asset allocation. This can cause some headaches for fund managers though, as conflict often exists between protecting the fund’s own intellectual property and having to provide investors with full disclosure and transparency.

AsiaHedge: What structures are available for Asia’s hedge fund managers to keep up with this customisation?

Caleb Wong: Asia’s hedge fund market is going to be an exciting space over the coming years. At the heart of this is the fact that Asian institutional investors are becoming increasingly more sophisticated. Then there are family offices – an area of the Asian market with high growth potential given its relative lack of maturity compared to other regions. Substantial pools of capital, combined with growing risk appetite and wider investment mandates present a tremendous opportunity for fund managers. In both cases, investors expect to be more active partners with their hedge fund managers, and want a degree of influence over certain investment and operational decisions. As a result, the interest and demand for tailored products is being seen mainly in the form of: separately managed accounts, co-investment vehicles, or special rights within a commingled product, and also more liquid alternative structures.

Managed accounts and co-investments in particular are the most popular with investors who favour this greater level of control. Managers are able to provide daily transparency, to facilitate a more bespoke fee structure, and offer a high level of flexibility that doesn’t allow other investors to determine liquidity. The most striking feature is that investors can now set investment parameters and controls.

Managers are able to carve out a concentrated portfolio of high-conviction ideas or to co invest in a new idea at the portfolio level. It is also clear that investors expect their hedge fund managers to remain flexible and willing to negotiate these structures. Being able to offer tailored individual offerings versus a standard commingled offering continues to become more important to the investors.

AsiaHedge: What administrative challenges do these more customized structures present?

Caleb Wong: While facilitating this customisation is becoming key to attracting and maintaining capital, the reality is that these structures do pose some operational challenges.

The barriers to entry are high on both sides. To start, the investor’s AUM obviously has to be of a sufficient size to make it worthwhile for the manager willing to provide customisation. If they are, then it really becomes a question of experience, scalability and resourcing for the fund manager. While the tailored structures will help attract new capital, facilitating the associated transparency, customised reporting, and changes to fee models comes at a cost and places a huge strain on existing systems and processes.

Legacy infrastructure, particularly the middle and back office, will likely require added investment to keep up with the shifting requirements of investors. Many are turning to outsourcing as a solution and working with a fund administrator with the relevant experience managing these structures so that they can focus on core investment activities. This is obviously great news for us, but the reality is that this is where a modern fund administrator needs to be positioned to add value for its hedge fund clients.

In our experience this can range from a simple middle-office lift-out, through to a front-to back infrastructure solution. The latter is proving to be increasingly popular with fund manager’s because it offers an end-toend view of operations while streamlining processes and creating much needed agility.

The result is a much smoother transition for both the hedge fund manager and the investor.

So there are definitely challenges that will ultimately fall on the hedge fund COO’s plate to resolve. But with the shift in investor preferences towards customisation showing little sign of abating, the long term upside to building this flexibility into the business model far outweighs the initial administrative burden.

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