The study, by The Bank of New York (BoNY) and Casey, Quirk & Acito LLC, said defined benefit pension plans are expected to represent the fastest growing source of institutional capital as investment policies and legislative changes facilitate new hedge fund strategies. The study is entitled Institutional Demand for Hedge Funds: New Opportunities and New Standards.
According to the study, institutions will increasingly emphasize lower volatility and risk as more capital flows into hedge funds. Institutions will also lower their return objectives to a relatively modest 8% annually, researchers asserted. Also, funds of hedge funds will maintain their current 50% share of institutional capital with little evidence that institutions will eventually favor total direct investing into individual hedge funds.
“The increasing influence of institutional investors in alternative investments and particularly hedge funds will dramatically change the way firms operate and define success,” said Brian Ruane, BoNY executive vice president. “Successful hedge fund firms will have to balance investment excellence with business, operations and client service acumen if they expect to attract a meaningful share of this capital.”
The study defined several attributes that will characterize the hedge fund firms best able to attract institutional capital, noting that many will be severely challenged by institutional investors to meet new stringent professional requirements.
Results from the study were compiled from one-on-one interviews with over 50 US and European institutional investors and hedge fund managers, primary survey research of more than 80 institutional investors and hedge fund managers, and using secondary sources to create a database of 400 US institutions identified as currently making hedge fund investments.
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