Institutions Still Like Hedge Funds, But Have More Questions

Feb 2 2009 | 1:56am ET

Institutional investors appear committed to hedge fund investing, but hedge fund managers will face wider-ranging and more in-depth scrutiny of operations and investment processes, according to a new report.

A new SEI and Greenwich Associates survey reveals that over 90% of institutions either increased or maintained their allocations to hedge funds in the last two years. That sentiment remained largely unchanged in November when three out of four investors re-surveyed said they had taken “no action” in response to the crisis.

At the same time, while the percentage planning to increase target allocations dropped significantly between the first- and second-round surveys (signaling a period of reassessment), only one institution reported lowering its target hedge fund allocation between the first and second rounds.

“The silver lining for hedge fund managers is that institutions appear committed to hedge funds as an asset class,” said Phil Masterson, managing director for SEI's Investment Manager Services division. “However, it's not an unconditional commitment. Greater transparency and enhanced client reporting and communications-along with fulfilling investor performance expectations-will be the pillars of a hedge fund manager's success."

In fact, performance has regained its spot as the top institutional investor concern, with more than 80% of investors citing poor performance as their biggest concern regarding hedge funds. Investors also cited lack of liquidity, funds not achieving their stated objectives and headline risk as top concerns.

“Transparency has always been a central concern for institutions investing in hedge funds, but it has taken on added importance in the wake of the financial crisis," said Rodger Smith, head of the Strategic Consulting Group at Greenwich Associates. “It's likely that institutions will become even more demanding on this count in light of the intense publicity surrounding the Madoff affair.”

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