In New Guide, CalPERS and Other Institutions Become More Vocal About Hedge Funds

Three years after the global financial crisis and amid a more stringent regulatory climate, institutional investors are outlining their hedge fund requirements in a new guide.

(May 31, 2011) — Large institutional investors, including the California Public Employees Retirement Scheme (CalPERS) and British Airways Pension Investment Management, are becoming more vocal about their hedge fund needs, reflecting a greater urgency following the financial crisis that hedge fund managers’ interests are aligned with theirs.

While hedge fund performance suffered during the financial crisis, the sector is now playing an increasingly important role among institutions. Earlier this month, for example, research by Preqin showed 94% of institutional investors who currently use hedge funds are likely to increase their commitment over the next three years.

The increased use of hedge funds among institutions coupled with a tougher regulatory environment have pushed pension funds, endowments, and other investors to write a 42-page guide — which is being published by London-based Alternative Investment Management Association (AIMA) — to help hedge fund managers better understand investor needs. The guide, which describes itself as a reference for hedge-fund managers, provides suggestions that range from the size of the fund’s board to the timing of hedge fund reports. The aim of the guide is to outline investor views, expectations, and preferences on a range of operational and organizational issues, which are increasingly the focus of due diligence reviews and discussion among investors and fund managers, AIMA said in a release.

One of the notable investors contributing to the report is the nation’s largest public pension — the $233 billion CalPERS, which now has $5.5 billion invested with hedge funds. “It is important that a significant amount of a hedge fund manager’s (including the senior team) wealth is invested in the fund(s) that the firm manages,” wrote Kurt Silberstein, one of the authors of the report, who oversees CalPERS’ hedge-fund program. “If the investor does not feel that the hedge fund manager has enough of its own capital invested in the fund, the hedge fund manager should be expected to reinvest a portion of the performance fees in the hedge fund.”

The other authors of the guide are Luke Dixon of the Universities Superannuation Scheme, Michelle McGregor Smith of British Airways Pension Investment Management, Andrea Gentilini from Union Bancaire Privee, and Adrian Sales at Albourne Parners.

AIMA Chairman Todd Groome stated: “AIMA is very pleased to sponsor this paper, outlining institutional investor views regarding a number of important areas of operational and organizational ‘infrastructure’, which are receiving increased industry focus. AIMA has supported and provided publications related to a wide variety of educational guides and best practices throughout its 20-year history. In light of the ongoing ‘institutionalization’ of the hedge fund industry and the growth of institutional investor participation, we hope that this paper, authored by some of the most influential investors and advisors in the industry, will be a useful reference guide to both investment managers and investors in hedge funds.”

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href=''></a>; 646-308-2742