20/20 foresight

The weight of institutional money is a force that will not be easily stopped, and one that is welcome, in the hedge fund arena.

Matching the wave of pension and other allocators' inflows has been a sweep of studies around the topic, with almost every new report about hedge funds now focusing on their interaction with institutional investors.

Last month KPMG released its report, Convergence and divergence: new forces shaping the investment universe, which, although focusing largely on the blurring of lines between investment approaches and vehicles, included a chapter on pension funds' expectations of hedge fund returns, their need for diversification and use of fund types allowed only relatively recently by Ucits provisions.

In a similar vein JP Morgan Asset Management found that in mid-November Europe's institutional investors planned to inject more than £72bn into alternative assets in the coming four years. Harking back to October 2006, Bank of New York and Casey, Quirk and Associates found that global institutional demand for hedge funds would triple from $360bn to more than $1trn by 2010.

Talking with fund of hedge fund managers such as FRM's Blaine Tomlinson, who foresaw this kind of occurrence back in the early to mid 1990s, and says simply the trend was all but inevitable, one realises how far-sighted it was to establish an FoHF operation catering largely to this audience.

It was for this reason, and for the systems, procedures and products Tomlinson put in place at FRM, that Hedge Funds Review and the judges of its European Fund of Hedge Funds Performance Awards chose him as inaugural recipient of the award for the long-term achievement in the FoHF industry.

The judges noted the institutional-type discipline at FRM, and Tomlinson's willingness to invest time and resources in developing this, and for taking such an early view on such distant horizons of the industry. And all this at a time when most in the industry either were not motivated to consider, or simply did not countenance, groundbreaking changes, to complement the fundament of the industry's HNWI clients.

As Tomlinson foresaw, the tectonic plates underpinning the hedge fund industry's early growth were not immovable. Tomlinson also recognised the serious undertaking in preparing for such seismic change, compiling first a database of the funds out there before looking at what to construct in terms of products.

Considering factor exposure and return drivers before combining hedge funds in a portfolio also displayed a level of gravity arguably lacking in the rest of the industry back then, when personal trust and "he's-a-good-chap" were perhaps the main ingredients for many FoHF managers in putting together their FoHFs.

Adding to the portfolio construction analysis was Tomlinson's early understanding of the importance of operational risk - that finding a good manager did not equate to finding a good, durable investment firm and fund. The seminal study quoted on operational risk - from The Capital Markets Company (Capco) in 2003 - found more than half of all hedge fund spectacular failures occurred due to non-investment reasons.

Blaine Tomlinson was mindful of this in his dealings with hedge funds more than a decade earlier.