Hedge funds are taking on a more central role in institutional portfolios. Executive committees and stakeholders who once considered hedge fund strategies high-risk, now regard them as more acceptable, if not essential, for diversification and risk management. Meanwhile, institutional investors have pulled back on private credit, increasingly eager to leverage the specialized expertise of hedge funds to achieve returns without needing to build that specific expertise in-house.

However, generating diversification and alpha from hedge funds is not as simple as pushing a button. As hedge fund strategies proliferate and multi-manager platforms grow, asset owners face new questions about allocation, risk, and operational readiness.

How hedge funds are reshaping asset owner portfolio strategy

Pension funds in particular love the non-correlated returns they get from hedge funds and other alts. This trend is unlikely to slow anytime soon, as most large US pension funds are interested in expanding hedge fund allocations, with billions of dollars earmarked for future investment. According to With Intelligence, many US allocators remain underweight in hedge funds, noting that the growing shift toward risk-mitigation portfolios is a key driver of manager search activity. For example, CalSTRS is $10 billion below target, Ohio PRS is $7 billion below target, and Ohio STRS is $6.4 billion below target allocations.ⁱ Meanwhile, the ILPA found that 90% of LPs have their current allocations to private equity (PE) either at target or within range.ⁱⁱ

However, pension funds face high public, internal, and political scrutiny and have rigorous reporting requirements for regulators, boards of trustees, and of course, plan participants. This is where fund chief investment officers (CIO) and other leaders run into obstacles with hedge fund business lines.

Asset owners grapple with hedge funds’ limited transparency

Hedge funds by nature are not traditionally concerned with delivering transparency above and beyond what is required. Hedge fund investors used to be happy to fork over the cash and then wait and see the (hopefully) outperforming returns on the quarterly statements. As digitization increased, asset owners are asking for more transparency and more frequent visibility into their alternative investments — from cashflows and performance drivers to fee breakdowns and portfolio company metrics. According to CSC Global, three in four LPs want performance data daily or on demand.ⁱⁱⁱ

The challenge is structural. There is no industry standard for how hedge funds deliver data. Each manager operates differently, with unique formats, reporting frequencies, and systems. A typical pension fund may have invested in 30 or 40 hedge funds; a large institutional investor could have up to 100. Some of those are likely multi-manager platforms, bringing another dimension of complexity, making it difficult to maintain a clear, timely view of risk and exposure. And now, that pace is unrelenting. In today’s environment, things move too quickly for any asset manager to operate without making deft, data-driven decisions in real time.

Can institutional investors accurately track hedge fund exposure?

Hedge funds and asset owners are often aligned from fundamentally opposing perspectives, at least in terms of reporting and communications. Hedge funds are naturally focused on driving performance across their strategies. But investors need to know where their exposures and positions are at any given moment, especially during disruptive periods like the outbreak of war, a wave of withdrawal requests, or a global health crisis. They may ask: what is our total exposure to private credit, including allocations within our hedge funds? What are the weighted average leverage levels and liquidity buckets across that exposure?

Answering these questions is far from straightforward. Private credit’s structural diversity makes it perhaps the most complicated asset class to deal with, operationally, with asset-based lending, specialty finance, revenue-based financing, and structured credit hybrids. So, what happens when an asset owner asks for this information?

The unstructured data problem

Forty different hedge funds will send forty different report formats upon an ad hoc request. They will come in via emails, PDFs, and spreadsheets. The result is a flood of unstructured data that legacy systems cannot easily process. With no industry standard for how GPs deliver data, the burden falls on asset owners, often turning into a time-sensitive Excel job.

The best thing would be to implement data infrastructure that is capable of working across multiple models; or better yet, an investment-fluent data foundation that can ingest and normalize any format, including unstructured datasets that come in via GP statements, capital calls, distributions, holdings, term sheets, and loan tapes.

Without this level of sophistication, asset owners are tasked with generating NAVs across multiple books of record across multiple systems, manually translating each into a unified data model. That is not only resource draining, but also slow, and not acceptable in moments when milliseconds matter.

Asset owners gain control with a modern data foundation

LPs like pension funds and endowments are pushing for near real-time transparency into deal parameters, such as multiples and weighted average coupons, to satisfy their own fiduciary duties and actuarial payout requirements. Asset owners are increasingly insourcing asset management, and their risk teams are now building the technical in-house capacity to monitor every capital call and risk outlier in real time.^ivInvestors are getting smarter about their technology and about the data they require from GPs. If they cannot control how their hedge funds report and operate, asset owners can make some big strides by taking more control of how they report and operate, internally.

This should begin with that modern data foundation that not only ingests and normalizes disparate data but also standardizes and consolidates the organization’s data into a single source of truth. This data consolidation makes the data easier to access by anyone in the fund (with permission), ensures everyone from risk to treasury is working with the same timely information, and enables a stack of fragmented middle- and back-office solutions to operate more efficiently with fewer breaks, bottlenecks, and errors.

What follows are real-time portfolio insights, reduced operational workloads, and a better audit trail. During periods of volatility, LPs can better determine the broader economic impact, assess the stability of the GP, and decide if they have enough liquidity in public investments to balance potential private market losses.

Data infrastructure is now a competitive advantage for asset owners

Hedge funds are showing off eye-popping numbers once again this year, as Q1 kicked off with $45 billion of new capital inflows. Last year was the biggest year for net inflows since 2007, at $115.8 billion.^v

As the role of hedge funds in institutional portfolios grows, asset owners will need to take care of their own data houses instead of relying fully on their individual fund managers to have buttoned-up, on-demand reporting and data analytics. Hedge funds are reshaping asset owner portfolio strategies and thus reshaping their data strategies. Investors can thrive in the complexity of hedge fund investments and bolster their own transparency by solving their data management challenges. The investor-fund relationship is definitely evolving. If data management practices evolve with it, everyone on both sides will make their lives easier, improve data flows across the industry, and free themselves up to drive returns.