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Hedge Fund Monthly
A New Era
Anthony Cowell, Partner, and Mikael Johnson, Partner
Jan 2011

As many institutional investors, seemingly disillusioned with traditional equity markets, turn to the alternative investment industry in search of better performance and risk diversification, their demands for institutional grade controls, increased transparency, more liquidity and flexible product strategies are helping to drive fundamental changes.

One of the main underlying transformations is in the approach to the manager-investor relationship. In the past, managers focused mainly on performance, giving relatively low priority to communicating with investors or developing close client relationships. Now, many managers recognise that the new breed of investor expects a closer relationship – in our recent research, 70% of managers say that after performance, client service is their top priority. These managers are keen to adopt what we have called 'Attentive Anticipation': building an organisational culture that anticipates clients' needs and expectations and ignites innovation.

For their part, institutional investors are demanding closer alignment between their interests and those of the managers. This means managers putting more of their own seed capital into their funds, listening to clients rather than just pushing products on to them, and offering more transparency and liquidity, for example, through different fund structures such as managed accounts and, in Europe, UCITS wrappers.

Alignment is also being sought through fee structures. Institutional investors do not regard the old '2 and 20' formula, by which the manager charged an annual fee equivalent to 2% of the fund's net asset value and 20% of the profit, as sustainable. Instead, institutional investors are seeking individually negotiated 'local' agreements – and managers are accepting their arguments.

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