How hedge funds achieve alignment with investors to foster long-term strategic partnerships
The Alternative Investment Management Association (AIMA), in collaboration with RSM, has recently released a compelling report that delves into the dynamic relationship between fund managers (GPs) and investors (LPs).
This report, based on a survey of 138 alternative investment fund managers with a combined estimated Asset Under Management (“AUM”) of $707 billion, aims to identify where investors' needs are being met and the extent to which the priorities of both parties align. Notably, the average AUM1 of the surveyed fund managers has increased to $5 billion from $3.7 billion in 2019, as shown in figure 1.
The report presents a comprehensive summary of key findings in four parts, providing a rich set of data points that shed light on the fascinating world of fund manager and investor alignment.
Part I. Aligning interests: The fundamentals
For managers, having significant personal capital invested in their fund remains central to reassuring their investors that their interests are aligned. This strong foundation to the relationship is now being built upon the application of greater transparency around the portfolio to facilitate more granular attribution analysis by investors, as well as more flexibility around fees and expenses and other aspects of the business.
Part II. The modern fee model
After years of downward pressure on fees, many investors and fund managers have settled on a new fee model that emphasises rewarding fund managers that can consistently deliver strong performance, albeit with more stringent hurdles to clear. In turn, managers have had to innovate how they charge fees and manage expenses through the use of new product structures and share classes that reward longer lock-up periods in exchange for fee discounts. While management fees remain below the historic 2% level, rising operational costs are being supplemented by more fees being charged to the fund pass-through to investors.
Part III. Innovating to maintain alignment
Fund managers are innovating their offering to win and retain investors with new fund structures and the launch of new products. Specifically, the increasing popularity of co-investment products in the hedge fund space may be providing the ideal vehicle for aligning interests. Relationships are being further deepened through strategic knowledge sharing and sophisticated conversations around complex issues incorporating ESG and responsible investment to the investment experience to ensure investors and their managers are aligned.
Part IV. ESG: adapting to the changing landscape
Responsible investment has entered a new phase. The macroeconomic headwinds of the moment are demanding a more nuanced ESG strategy that transcends binary exclusion lists and is only applied where relevant.
For more detailed information and to download the full report, visit In Sync (aima.org)
The Long-Short Podcast
The Long-Short Podcast, presented by the Alternative Investment Management Association (AIMA), offers the latest insights on the alternative investment industry. Scott Mackey, Partner at RSM, decodes the findings of the report and delves into the dynamic landscape of how hedge funds establish alignment with investors to foster long-term strategic partnerships.
To listen to this informative episode of The Long-Short Podcast, titled "Ep 56. The Long-Short | Decoding hedge fund and investor alignment, visit Ep 56. The Long-Short | Decoding hedge fund and investor alignment (aima.org) for more details.
Our financial services division at RSM Singapore provides audit, tax, and consulting services to clients in the financial services sector. We specialise in serving clients in banking, insurance, capital markets, private equity, and hedge funds. Our services include financial statement audits, regulatory compliance, risk management, tax advisory, and consulting services. We work closely with our clients to provide customised solutions that help them achieve their business objectives.
To find out more about RSM’s Financial Services Practice, please contact our specialists:
Chow Khen Seng
Partner & Industry Lead, Financial Services Practice
T +65 6715 1388
Chua Hwee Theng
Director & Deputy Industry Lead, Financial Services Practice
T +65 6594 7319
The contents of this article are taken from a report published by AIMA, in collaboration with RSM. RSM Singapore does not claim any ownership and all rights pertaining to its content and production, including copyright and database rights, belong solely to AIMA.