The Hedge Fund sector is increasingly becoming more ‘investor friendly’. With constant regulation updates to adding new business strategies tailored to current market movements, hedge funds are heading upwards with a stronger and more stable momentum, making it look like it did not undergo the 2008 financial crisis. With steady growth projected this year and the JOBS (Jumpstart Our Business Startups) Act gaining strong foothold across hedge fund managers and investors, now is an opportune time to consider investing in hedge funds.
Because of these incremental changes in the industry, several hedge funds business models have been introduced in the market. The most relatively significant models are the Fund of Hedge Funds (FoHF) and Fund of Managed Accounts (FoMA). According to alternative investments group BarclayHedge, FoHF is “an investment vehicle whose portfolio consists of shares in a number of hedge funds.” Its direct investment approach differs it from FoMA that “invests into several managed accounts each typically replicating the investment strategy of an existing hedge fund,” Sean Coleman of Sciens Capital Management said. The FoMA model is touted as the answer to the current trend wherein investors’ demands for diversified hedge funds disclosure gets mainstream. “A FoMA can either invest solely in the managed accounts of a single platform provider or be multi-platform, investing in the managed accounts of multiple platforms,” Coleman says.
Furthermore, the platform service provider serves as an asset manager in-charge of the operation and has the authority over the account, while the hedge fund manager acts as the trading advisor taking over the trading and investment of the managed account. Two of the most important issues FoMA model also tries to address are fraud mitigation and investor-manager transparency. With the help of technology, investors can now access detailed reports of managed accounts. Some platforms also offer risk analysis reporting. In terms of fraud mitigation, Cole said that with FoMA trading advisors cannot move cash, unless transaction is between approved accounts under the managed account. Because of the crisis seven years ago, hedge fund managers and providers are now being measured in terms of their ability to adapt to the market the fastest and the most effective way possible. The crisis also benchmarked the industry shift from passive managers to active administrators. “If you want to succeed as a manager of managers in this environment, ‘you have got to be different,’ says Robert Kaplan, CIO of Permal Group. ‘The days of being a passive hedge fund allocator are long gone. You have to offer insight, and you have to offer judgment,’” Immogen Rose-Smith said in Arnerich Massena, Inc.’s ‘What is the Future of Funds of Hedge Funds research.’