Meeting institutional needs

Our institutional client base is truly diverse, encompassing pension plans, insurance companies, asset managers (including funds of funds, banks, family offices and endowments), joint-venture partners and corporations around the world.

Institutions began allocating to hedge funds in a meaningful way after the equity market downturn in 2000, to make up funding shortfalls or as an alternative to stocks as a long-term performance driver. To date they have favoured fund of hedge funds and tailor-made hedge fund solutions to align more closely performance to liabilities and provide a valuable source of diversification in their portfolios.

Historically, hedge funds have performed these tasks successfully, outperforming stocks with considerably lower volatility and offering a degree of diversification and downside protection during market downturns. Hedge funds' flexible approach to investment also makes them ideal tools for liability matching and for developing efficient and robust investment structures.

Impact of 2008

Institutional investors and hedge fund models faced enormous challenges as credit markets ground to a halt in 2008. Institutions struggled with tightening liquidity, declining Tier 1 capital as their own shares and equity holdings contracted, and significant challenges to their earnings. Many responded by selling assets, including investments in hedge funds, to raise capital and to de-lever and de-risk their portfolios.

Hedge funds, for the most part, were in advance of the market as many had begun to reduce market exposure and leverage as early as 2007. Nevertheless, a large number of managers were unable to avoid the full force of the downturn as redemptions and de-leveraging led to the forced sale of assets in a buyer's market. Structural issues such as the bans on short-selling and the failure of some market counterparties (brokers and credit providers) also hurt some hedge fund models. In this environment, many hedge funds lost money and a number of strategic and operational issues came to light.

Despite recent events, hedge funds remain a very attractive asset class for institutional investors. While overall returns in 2008 were disappointing, hedge funds have historically delivered strong growth with a controlled level of volatility and have demonstrated the ability to recover quickly from drawdowns. Nevertheless, in future corporate investors will be playing close attention to:

• Operational control, particularly the management of counterparty relationships, credit facilities, leverage and liquidity;
• Transparency into the investment process so institutions can quantify their exposure to certain categories of risk across all of their portfolio;
• Risk management, with verifiable risk procedures and clear segregation between portfolio and managers;
• Liquidity, so that investors can access capital at need - this is likely to be met through extensive use of managed accounts; and
• Independent oversight using trusted external agencies to verify accounts and, potentially, provide risk reporting.

Future institutional investment in hedge funds will, as a consequence, become increasingly dependent on our ability to address these considerations. Institutions are also increasingly demanding end to end service providing access to information, a direct channel to the investment managers, detailed standardised reporting and prompt complaint and query handling.

Addressing institutional requirements

Man is particularly well equipped to adjust to this new paradigm. We already meet many of these requirements, offering an extensive managed accounts platform and a broad range of diversified, single style and niche fund of hedge fund portfolios as well as single-manager strategies.

We also are widely recognised for our ability to structure innovative and customised hedge fund solutions to meet specific investor tax or regulatory requirements or to engineer portfolios to target defined performance or market objectives. Our global service infrastructure, deep resources and institutional set-up enables the provision of an end-to-end service to clients.

New regulation and more stringent investor requirements will promote economies of scale and be a force for consolidation. Man's strong balance sheet and ability to lead the policy agenda means that we are likely to benefit from this process. Due to our scale, long industry experience and established relationships with other leading institutions, we are well positioned to respond to these changes and meet the evolving needs of institutional investors.

Focus on RMF Products

Members of the RMF management team. From left to right - Stefan Scholz, Jaime Castan, Herbert Item, Reto Grau

The extensive and diverse RMF product range, with its strong track record dating back to 1992, provides tailored investment solutions to satisfy a broad range of institutional investor requirements. The product offering spans a wide spectrum, from the highly diversified RMF Four Seasons, to more concentrated products such as RMF Dynamic Selection.