From good to growth:
Why institutionalizing hedge funds creates value for owners and investors

November 2012

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At a glance

Hedge funds are searching for ways to boost fund value, increase ROI, and ensure the sustainability of their businesses. In our view, few have the level of institutionalization in place to succeed.

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Why institutionalizing hedge funds creates value for owners and investors

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In the aftermath of the financial crisis, hedge funds face growing pressure from regulators, investors, the media, and the public to increase transparency and enhance risk management.

Hedge funds face a myriad of regulatory initiatives designed to increase transparency and improve reporting. These include, among others, Dodd-Frank (including Form PF regulation), the Foreign Account Tax Compliance Act (FATCA), IRS form 5500 schedule C, and GASB Statement No. 53. Institutional investors, which accounted for 60% of hedge funds’ total capital in 2011, have substantial influence in determining how funds are managed today. These investors are becoming more rigorous in evaluating fund managers’ execution of investment strategies.

They are demanding higher quality reporting and infrastructure, and avoiding funds that fail to clearly demonstrate adherence to, and support for, regulatory risk management standards.

 What is institutionalization?
Gary Meltzer and his peers define institutionalization and address how to prioritize the process of institutionalization within an organization.

 Organize for growth - The people implications of institutionalization
Gary Meltzer and his peers address the importance of attracting, retaining and organizing talent and the overall impact of people within the institutionalization process.

 Establish trust and transparency
Gary Meltzer and his peers discuss how the process of institutionalization can help hedge funds address the issue of reputational risk.