RJ and Makay

Institutional investors are showing greater confidence in hedge funds, suggests a new survey conducted jointly by SEI and Greenwich Associates. Of the institutional investors surveyed, 54% said they plan to increase their hedge fund allocations over the next year.

However, their renewed commitment to hedge funds comes with certain strings, particularly requirements for increased transparency and risk management. In fact, 75% of respondents said risk management infrastructure is the second most important hedge fund selection criteria. Seventy-nine percent said clarity of investment philosophy is “very important.”

For the first time an annual report on hedge funds done by consulting firm Greenwich Associates for Ernst & Young is including the views of institutional investors along with the usual focus group of hedge funds. The study recorded the views and opinions of 104 hedge funds, representing US$585 billion in assets under management, and 53 institutional investors representing US$260 billion in assets under management, more than one-fourth of which are invested in hedge funds.  In the report, entitled Restoring the Balance, both the shared views and gaps in opinions between both groups were highlighted. Ratan Engineer, global leader of Ernst & Young’s Asset Management practice says: “We hope the views expressed in the report will stimulate constructive debate – not just between investors and hedge fund managers, but throughout the financial community.”

Over half the institutional investors feel they currently have more negotiating power, with over 40% saying they have pressured their hedge fund managers to lower management and incentive fees. A third of the Investors say they need more liquidity than before the economically pivotal month of September 2008, and 30% say the maximum lock-up and the maximum gate they will accept is diminished from what they were prior to the financial crisis.