Turbulent Times Won't Hinder Hedge Fund Allocations

A State Street news release reported there was amoderate decline in overall allocations to hedge funds, with institutions allocating more than 5% of their portfolio to hedge funds decreasing from 68% in 2007 to 51% in 2008. Nevertheless, most institutions intend to either increase (49%) or maintain (39%) their allocation to hedge funds in the next year.

“Hedge funds have not been immune to the extremely volatile market environment,” said Gary Enos, executive vice president and head of relationship management and client strategy for State Street’s Alternative Investment Solutions team, in the news release. “While alternative investments, including hedge funds, largely outperformed traditional investments in 2008, negative returns understandably disappointed. Although hedge fund allocations declined slightly over the past year, we anticipate growth will resume later in 2009, as institutional investors continue to focus on diversification and risk management.”

Another encouraging sign for alternatives is increased institutional interest in private equity funds, State Street said. More than half of institutions have allocated more than 5% of their portfolio to private equity funds, and half intend to increase their allocation to private equity over the next year.

More institutions than in the past reported that accurately valuing hedge fund holdings can be problematic (77% versus 55% in 2007). Two-thirds of institutional investors (64%) attribute the accurate valuation of their hedge fund holdings to the use of an independent fund administrator.

State Street said while one-third of institutions place a greater emphasis on qualitative analysis when monitoring the ongoing performance of alternative investments, half place an emphasis on both qualitative and quantitative analysis. Further, nearly two-thirds (61%) of institutional investors either intend to (17%) or already are (44%) aggregating alternative investment risk exposures with other portfolio exposures to gain a meaningful assessment of risk across their portfolio.

According to State Street, respondents included representatives from global public and government pensions (37%), corporate pensions (19%), endowments and foundations (29%), and insurance companies (5%) with an estimated $1 trillion in total investable assets.