Explanation:
D is correct. The significant growth in hedge fund assets under management (AUM) and the structural shift towards institutional investors were largely driven by institutions seeking absolute returns and diversification benefits outside traditional long-only equity and bond markets. This occurred even though true alpha generated by hedge funds became arguably less consistent or harder to achieve over time as the industry grew. Institutional allocations provide stable, large-scale capital inputs into the industry.
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Q.9 Pauline Nguyen, a financial analyst at Evergreen Investments, is evaluating trends in the hedge fund industry. She observes a marked shift in the investor profile and a surge in assets under management (AUM) over the past decade. Specifically, she notes a shift from predominantly private wealth investors to institutional investors, and a corresponding increase in AUM from $197 billion at the end of 1999 to $1.39 trillion by the end of 2007. Given Pauline’s observations, which of the following statements correctly captures the factors contributing to the rising concentration of AUM in the hedge fund industry?
A
The driving force is the promise of higher returns in hedge funds compared to traditional equity markets, irrespective of the associated risk and higher fee structures.
B
The shift in investor profile is due to the declining interest of private wealth investors and the high risk associated with hedge funds.
C
Institutional investors are attracted by the possibility of consistent alpha generation in hedge funds, which leads to an increase in AUM.
D
The pursuit of absolute performance and diversification beyond traditional equity markets by institutional investors, despite concerns about alpha, has been the catalyst for increasing AUM.
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