Survey Says Hedge Funds To Decline In Importance

Nov 11 2008 | 4:41am ET

It’s not surprise that, with hedge fund returns down in the dumps, investors are becoming more reticent about an asset class they once couldn’t get enough of.

A new survey of financial advisers and institutional investors by Morningstar and Barron’s magazine finds widespread concern about the lack of liquidity in hedge funds, which more than half of respondents citing it as a reason to hesitate in picking hedge funds. Advisers and institutions also worry about the industry’s lack of transparency and fee structure.

More alarming for the industry, many of those surveyed may be planning to do something about those concerns. Almost half of financial advisers and 37% of institutions told Morningstar that they expect hedge funds to become somewhat less or much less important parts of their portfolios over the next five years. By contrast, just a quarter of advisers and 30% of institutions expect hedge funds to become more important to their portfolios.

“Our survey found that both institutions and advisors want alternative investments that are liquid, transparent, and regulated like traditional investments,” said Steve Deutsch, director of separate accounts and collective investment trusts at Morningstar. “This demand is driving the convergence of traditional and alternative money management. We're seeing more alternative investment strategies in mutual funds and ETFs, higher prevalence of retail and alternative money managers competing for assets under management, and traditional money managers acquiring, merging with, or recruiting alternative investment expertise.”

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