These days, the manager’s flagship hedge FoF accounts for an ever-smaller component of its business: most of the time, it researches the universe of hedge funds and advises institutions on the strategies, often undertaking due diligence and tailoring hedge fund programs for investors. Less a manager, K2 is more the “strategic advisor,” Saunders says. Instit uti onalis ati on of hedge funds This is one aspect of the ongoing “institutionalisation” of hedge funds, which began at the turn of the century when US pension bought the strategies to diversify away from long publicequity biases, and then was accelerated by the financial crisis as many of the traditional hedge fund backers, high-net-worth investors, redeemed their commitments to gain liquidity. As a whole, institutions were less flighty. They now represent a more stable asset base for hedge funds as they invest in the strategies to achieve specific, long-term investment outcomes. “Crisis or no crisis, this institutionalisation has been happening since 2000,” Saunders says.

Of the US$9.7 billion managed by K2, 94 per cent of these assets are institutional. Now that institutions are more attuned to hedge funds, they are also asserting themselves more forcefully. They are, rightfully, a demanding investor base. “They’re fiduciaries. They’re fee-conscious. They want transparency and benchmarking to know how the strategies apply to their overall portfolio,” Saunders says. “The traditional hedge fund deal is: you give me the money, and I send you the net asset value and perhaps a nice little letter. It’s changed. These investors not only want to know, but need to know because they’re fiduciaries.” These demands have, in many cases, provided investors with a better understanding of hedge funds and led to a more sophisticated deployment of them. Long/short equity strategies, for instance, shouldn’t necessarily sit in the alternatives bucket, Saunders says. “With the transparency available today, they should be captured in the equity allocation. You can’t ignore this exposure to equities because it sits in your alternatives bucket.

“Institutional thinking about hedge funds is evolving, which is forcing us to evolve. Sometimes we change, sometimes they ask us to. That’s a partnership.” Each time a customised solution is developed through such a partnership, new intellectual property is created, says Samuel Mann, managing director of K2 Advisors’ Australia office. Sometimes this can be transferred to other clients confronted with similar challenges. As K2’s investor base has become more institutionalised, its client service headcount has swelled. Not only do investors need transparency and data about their market exposures, liquidity and returns, but also they want dialogue, Saunders says. “What they want to know is if the manager has still got that edge.” He says receiving data without commentary can be an unfulfilling experience. “You’re not getting into the investment process and idea generation – the alpha – just a bunch of data-gathering.”