Institutional Investors More Comfortable with Hedge Funds

In a press release, State Street said more than half of study participants said their governing bodies are more comfortable investing in hedge funds now than they were 12 months ago. Additionally, more than half of investment boards said they spend 15% or more of their time on hedge fund investments.

In the current study, 4% of asset owners indicated they have no hedge fund investments, down from 16% in the last study, the release said. Another indicator of the growing comfort with hedge fund investing is the increase in the number of hedge fund managers hired directly by institutions and the corresponding decrease in use of fund of hedge funds.

More than half (56%) of study participants said they invest with more than 10 direct hedge fund managers, versus 48% in last years study. In addition, nearly a third of institutions indicated they used no fund-of-funds managers, compared to just over a quarter of institutions that said the same in the 2006 study. Six-in-ten participants said they use the services of between one and three fund-of-funds managers and only 8% used four or more, compared to 43% and 29% in last year’s study, respectively.

Issues of concern to institutional investors surveyed were risk management and fees. Half of study participants said the negative effects of recent publicized hedge fund manager debacles on institutional portfolios have prompted their boards to call for a more robust risk management program. Nearly half cited a need for additional reporting and analysis on the part of hedge fund managers and more rigorous due diligence practices. 

A majority of institutions surveyed said they find it difficult to gain a portfolio-wide view of risk, and that aggregating risk statistics provided by all hedge funds in their portfolio was problematic. A majority also said obtaining an accurate valuation of hedge fund holdings can be problematic.

High fees offsetting returns was identified as the greatest threat to hedge fund investing by nearly a third of institutions. Other threats included headline risk (20%) and investment loss (20%). “As fees continue to eat away at precious returns, more institutions will balk at paying ‘alpha’ fees for ‘beta’ performance,” said Jane Tisdale, senior managing director of Absolute Return Strategies at State Street Global Advisors, in the release. “Asset owners will likely begin to force fee compression for all but the most successful funds.”

State Street conducted the study late last year in conjunction with the 2006 Global Absolute Return Congress (Global ARC).  Asset owners participating in the study included representatives from global corporate pensions (21%), public and government pensions (32%), and endowments and foundations (44%), with investable assets totaling more than $1 trillion.

For a copy of the study, email publicrelations@statestreet.com .