When it comes to hedge funds winning institutional business, the amount of resources dedicated to client service means everything and more, a study of mid-sized firms has concluded.

In a Nov.17 announcement, professional services firm RSM McGladery said research reveals that mid-sized hedge funds with $100-$500 million in assets are facing a “reality gap.”

The New York-based firm provides tax and consulting services under the McGladery brand. The survey was conducted from June to July 2010, and includes data from telephone interviews conducted by Greenwich Associates of 52 U.S. hedge fund executives. All of the funds had assets under management between $100 million and $500 million.

Findings conclude that while nearly 95% of hedge funds included in the data set believe they can meet institutional investors’ demands, only 22% have more than one full time employee responsible for client service, RSM McGladery said in the announcement.

Furthermore, only 9% have highly automated reporting systems.

Alan Alzfan, managing director in the Financial Services Group at RSM McGladery points out that going forward, attracting institutional money will “require ongoing personnel expenses for the majority of mid-sized hedge funds.”

“Mid-sized hedge funds must understand that implementing best practices for a truly institutional platform is not an overnight process—it can take more than a year in many cases.”

Also, more than 90% of the 52 U.S. hedge funds surveyed reported that they have an unfocused business model, targeting institutional, fund of funds and high-net-worth individuals/family office clients. More significantly, nearly one-quarter of respondents have seen an increase in institutional clients over the past two years, with 17% reporting a decrease. And, 47% of funds for whom institutional investors represent a majority of clients say having a dedicated client service team is "critically important" in winning assignments. It is noted that on average, funds with two or more full-time sales professionals won more than 10 mandates in the past year, while funds with fewer salespeople won seven.

However, the due diligence process required by most institutional investors had 64% of the respondents labeling the clients as “more burdensome” based on the often 30-40 pages of questionnaires and liquidity needs.

“Some managers will choose to limit or even cease activity in the institutional space given the changes that are necessary to the funds' business model to compete for institutional assets," Alzfan said in the announcement. "But managers who want to gain consistent access to institutions' large allocations of capital and the resulting fees--both management and incentive--will have little choice but to take on at least some of the risks involved in investing in their funds' infrastructure and adjusting their liquidity terms."