Hedge fund investors have moved towards 'ultra customization,' and it's changing how funds raise money

Alternative asset managers increasingly are being asked to create specialty products for their largest investors. More than a quarter of new money that flowed into the $3.2 trillion hedge fund industry last year went into customized strategies offered through a separately managed account or fund-of-one, according to research from Jefferies. In 2016, only 14% of hedge fund investors said they would be interested in a hedge fund offered in a SMA structure, according to a FIS Global report.

In these structures, a large investor is often the only investor in a fund. This gives these investors more leverage when negotiating fees and strategy requirements. But there are clear drawbacks and cautionary tales of tying up all or most of your asset base with one investor. For starters, as one manager put it, you're no longer running your own business: You're a de facto employee working for a pension fund or endowment.

With a sufficient amount of capital, the firm focused on perfecting its models and running the money it had instead of seeking out more investors, Valentine said. But the financial crisis of 2008 forced Man Group to redeem several of its hedge fund positions — leaving Quest with less than $50 million in assets in 2010 after the firm had been running more than $600 million before the crisis.

"When we were unable to raise money after 2008, I said let's address the problem, people aren't interested in what we do, but we can be interested in what they are looking for," said Koulajian.has become tougher, with increased costs for technology and compliance along with more competition giving investors with capital to burn the upper hand in any negotiations.last year for the first time since fund tracker Preqin began watching hedge funds in 2003.

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