Study: Hedgies Need To Make Strategies More Comprehensible

Jan 23 2012 | 10:28am ET

Institutional investors are more committed than ever to hedge funds but they want to know more about their value propositions, risk mitigation methodology and performance expectations.

That’s the conclusion of “The Shifting Hedge Fund Landscape: Institutions Put Fund Managers to the Test,” a study by SEI in collaboration with Greenwich Associates. The survey of 105 institutional investors indicates a need for hedge fund managers to “help clients clearly understand their investment strategies, performance expectations, and the tradeoffs between risk and reward to maintain investor confidence and attract new capital.”

SEI/Greenwich Associates found that while the percentage of respondents intending to increase their hedge fund allocations over the next 12 months (38%) was lower than in previous years, hedge fund allocations represent a greater share of respondents’ overall portfolios—almost 18%, up from 12% in 2008.

As for why they invest in hedge funds, absolute return was the objective named by over one-third of respondents, followed by non-correlation.

“Although returns are understandably a top objective, risk management also remains at the front of investors’ minds,” said Rodger Smith, managing director of Greenwich Associates. “Three of the top four goals named by respondents— accessing non-correlated strategies, diversification, and lowering volatility—address investment risks. This suggests that institutions today use hedge funds to help them lower portfolio risks in addition to boosting returns.”
 
“Particularly in times of market uncertainty, managers must proactively communicate with investors with the goal of reinforcing confidence in the manager’s investment process,” said Philip Masterson, senior vice president and head of business development, Europe, for SEI’s investment manager services division. “Investors are clearly looking for better returns, but they are also demanding a higher degree of overall risk management. To stand out and attract investors, managers will have to be more forthcoming not just in how they are enhancing their investors’ returns, but also demonstrate how they manage the portfolio’s risk exposure.”

A full 82% of respondents named long/short equity among the top three strategies they presently employ followed by event-driven (53%) and credit (42%). Only 15% planned to allocate to regulated products like alternative mutual funds or UCITS vehicles in the coming year. 
 
And despite a disappointing year for hedge fund returns, only 7% of investors polled reported any level of dissatisfaction with their returns.
 
That said, there was some concern related to hedge fund performance: investors were split by a margin of 41-to-25% as to whether they would be able to meet return objectives without having hedge funds in their toolkits.

The authors also note that direct hedge fund investing is continuing to gain momentum, with 40% of those polled investing solely via single-manager funds, up from 24% in 2010. More than half (56%) of respondents with more than $5 billion in assets said they use single-manager funds exclusively.
 


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