Institutional investors are spurring hedge funds to grow operations and increase transparency, according to a report by KPMG and the Alternative Investment Management Association (AIMA).

Since the beginning of the financial crisis, the hedge fund industry has undergone significant change, says the report, The Evolution of an Industry. Prior to the crisis, the primary source of capital came from non-institutional investors such as high-net worth individuals and family businesses; however institutional investors are now the leading allocators to hedge funds.

This change means hedge funds have had to adapt to the new source of capital, and the demands associated with institutional investors—namely, the need for a more robust operational infrastructure and thorough terms of due diligence.

“The increased due diligence demands of institutional investors are certainly being felt by Canadian managers,” said Peter Hayes, partner, national director, alternative investments, KPMG. “That being said, the Canadian hedge fund market has always been heavily regulated and Canadian managers are well-positioned to meet the increased scrutiny from investors, regulators and others that many in the global hedge fund space are only just starting to experience.”

The report found that institutional investors now represent a clear majority of all assets under management for hedge funds, with 57% of assets under management in this category.

As well, the survey found that 84% of respondents indicated that they had increased transparency to investors since 2008, and the amount of time managers say they have spent handling due diligence inquiries from investors has doubled since 2008.

Hedge fund managers have also significantly increased headcount to respond to regulatory compliance requirements and investor demand for transparency and due diligence.

“Institutionalization has been described as the continuing inflow of new institutional capital into the industry, but as this report demonstrates, it is also about increasing the sophistication of operational infrastructure with respect to transparency, compliance and due diligence,” said Gary Ostoich, chairman of AIMA Canada.