It’s been a particularly strong year for hedge funds. In May alone, $22 billion of new capital was added bringing year-to-date flows to $93.3 billion. That’s the strongest start to a year since 2007.
The industry’s growth is part of a larger trend since the financial crisis that involved hedge funds changing the way they ran their firms.
Before the crisis, many hedge funds left clients in the dark about their strategies and their overall approach to investing. In those days, client simply shelled out a couple million dollars, received performance updates and paid their enormous 2 percent and 20 percent fees.
Since the crisis though, more hedge funds have opened up their doors and taken a more consultative approach with clients. Much of that is the result of stricter rules from regulators, and due diligence requirements by deep-pocketed investors.
Giant institutional investors expect a lot more information these days than hedge funds were open to sharing just a few years ago. Hedge funds are no longer keen on keeping their doors (and books) closed to investors looking to allocate hundreds of millions of dollars.
Not surprisingly, institutional investors have since been the been the main driver of surge in hedge fund assets.
According to a report from Citigroup, institutional clients made up 20% of hedge fund assets in 2002, while family offices and high-net-worth individuals made up the rest. By 2007, institutional investors made up 47% of the industry’s total assets, and today they account for 65% of hedge fund assets.
Further, the report noted that that institutional investors will help boost total hedge fund assets to a whopping $5.8 tillion in 2018.
