Survey Says: Institutional Investors Want Transparency, Risk Management from Hedge Funds

Jan 18 2011 | 10:45am ET

Institutional investors are increasing their target allocations to hedge funds but are demanding transparency and risk management infrastructure in return, according to a new report from SEI.

SEI, in conjunction with Greenwich Associates, polled 111 institutions—including 97 institutional investors—and discovered 54% planned to increase their target allocations to hedge funds over the next 12 months. When asked about hedge fund selection criteria, 79% of respondents named clarity of investment philosophy “very important,” while 75% said the same of risk management infrastructure.

SEI notes that risk management did not rank in the top 10 selection factors in last year’s report.

“The study confirms what we have been seeing and hearing from our clients—that investors are committed to hedge funds, but managers must get and keep investors comfortable with their investment decision,” said Phil Masterson, managing director for SEI’s investment manager services division. “Managers must differentiate themselves through increased transparency, enhanced risk management, and reporting as well as better overall client service to gain and retain assets post-financial crisis and post-Madoff. We’ve been making investments in new technologies and enhancing our services to help our clients do just that over the past 18 months and we’ll continue to help them stay ahead of the curve.”

Transparency remains a concern for 70% of respondents, who listed the lack thereof as their greatest worry (up from 56% in 2009). In terms of the type of information sought, over 75% of respondents want risk analytics from managers, a category that SEI notes didn’t even appear on last year’s top 10 list. Another 58% of respondents named liquidity as their biggest worry in hedge fund investing and over 40% said they had taken steps to enhance the liquidity of their hedge fund investments.
The report also noted that investors are not relying on regulation to improve hedge fund disclosure, liquidity or risk management. Nearly one-third of respondents cite “limited regulation” as a primary concern of hedge fund investing. As investors are proactively seeking to have their concerns addressed, managers are responding.
”The hedge fund managers best equipped to compete prospectively will be those able to clearly articulate their value proposition and source of alpha, as well as demonstrate institutional-quality operations and risk management infrastructure,” says Masterson.

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