One of my favorite aspects of The Markets Group’s ALTS series is the range of perspectives it brings to the same questions.
The theme of “hedge funds reimagined” has appeared on the agenda at multiple ALTS events over the past year, but the conversation continues to evolve. In Chicago, we focused heavily on the institutional infrastructure managers need when reengaging allocators. At the most recent ALTS conference in Washington, D.C., our discussion moved one level deeper: What problem are we actually trying to solve, and does the structure help or hinder that objective?
As moderator of “Hedge Funds Reimagined – Evergreen, Open-End, Drawdown and Interval Structures” at this year’s event, we explored that question alongside a researcher, allocator and a manager. Three distinct perspectives led us to one clear conclusion: there is no universally “right” hedge fund structure.
That may sound obvious, but it has important implications.
The renewed interest in hedge funds comes at a time when many institutional portfolios are already heavily allocated to private markets, market volatility remains elevated and investors are reconsidering the diversification assumptions they once relied upon. For many, 2022 was an important reminder to ask a deceptively simple question: Am I getting the diversification I think I’m getting?
That question shifts the conversation away from labels. Instead of starting with “hedge fund,” “private equity,” “evergreen” or “interval fund,” investors can start with the outcome they need. Is the objective crisis alpha? Low correlation? Income? Capital appreciation? Liquidity during periods of market stress? Only then does it make sense for the wrapper to enter the conversation.
That became particularly important as we discussed structure options, including open-end, evergreen, drawdown, interval and registered structures. Expanding access can be valuable, but ensuring an investment strategy is appropriate for a particular structure remains paramount. Packaging a strategy into a particular structure simply because that vehicle is easier to distribute can create unintended compromises. If there is an engine of return, the wrapper should be flexible enough to support it, not fundamentally alter it.
Liquidity is a prime example. Investors increasingly want clearer and more flexible liquidity, yet the underlying investment strategy may not always accommodate it. Conversely, a hedge fund intended to serve as a liquid diversifier can lose much of that portfolio value if its redemption terms make capital unavailable when markets dislocate.
Liquidity and alignment, we agreed, are related but they are not the same conversation. Both begin with understanding what the investment is supposed to do.
The audience discussion added another important dimension: fees. Investors are increasingly unwilling to pay traditional fees only to see beta in their returns. Increasingly, relationships, transparency and genuine partnership matter now more than ever. The overarching goal remains to align the structure, economics and investment exposure.
My biggest takeaway from ALTSDC was simple: start with the problem you are trying to solve. Understand the true source of return. Be deliberate about liquidity, alignment and access. Then choose the structure that best supports the investment objective.
The future of hedge funds may be less about reinventing the strategy itself and more about being increasingly thoughtful about how that strategy is delivered. As investor needs evolve, the opportunity is to pair the right engine of return with the right structure, economics and liquidity without compromising what made the strategy compelling in the first place.
Contact Camille Clemons or a member of your service team to discuss this topic further.
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