Investors Vote on Their Top Hedge Fund Concerns

Almost three quarters of institutional investors in a survey rank a hedge fund’s compliance and regulatory framework as the top priority.

The survey, by Deutsche Bank’s Hedge Fund Consulting group, has identified the changing regulatory environment as the driving factor in the growing importance of operational due diligence (ODD).

The survey polled 68 institutional investor entities globally representing over $2.13 trillion of total assets, with a hedge fund allocation in excess of $724 billion. Sixty-three percent of respondents manage more than $1 billion in hedge fund AuM.

Operational due diligence has continued to grow in importance and a significant 70% of ODD teams now have explicit veto authority in the investment decision making process, which was exercised in almost 10% of manager reviews. In a further sign of the influence ODD teams now hold, 63% of investors will not reconsider investing in a fund previously vetoed by the ODD team.

The survey also revealed that investors are placing greater emphasis on the depth and breadth of their ODD team, are more focused on fund expenses, and expect independent governance. Eighty percent of respondents have a dedicated ODD team; a majority of respondents have little or no tolerance for expenses such as non research related travel or employee compensation being charged to the fund, and nearly a quarter vetoed an investment due to lack of independent governance. Furthermore, respondents ranked investment in human capital and proper segregation of duties as the top two operational recommendations for start-up and emerging managers.

Separately, the results of the 20th annual Global Custodian survey of the perceptions of prime brokers by their hedge fund clients were published last week. For subscribers, full results of the survey can be found here.