US - Institutional investors are becoming more comfortable with hedge funds, but most have also called for a more rigorous risk management program, according to a survey by State Street released today.
More than a third of the pension funds, endowments and foundations surveyed, with combined assets of over US$1trn, said they would increase the use of third party resources for due diligence and investment recommendations when using hedge funds.
Executive vice president and head of State Street’s investment servicing business Gary Enos said: “The tools, methods and best practices for managing risk will further develop as hedge funds become a tried and true staple of institutional portfolios.”
More than half now invest in some kind of hedge fund, although over a third of these no longer use fund-of-fund managers, preferring to invest in one single institution.
State Street puts this down to “growing sophistication and familiarity with hedge fund investing and a cost-benefit analysis in favour of a do-it-yourself approach”.
A third of respondents identified high fees to be the biggest hurdle faced by hedge funds.
Senior managing director of absolute return strategies at State Street, Jane Tisdale, said investors would likely begin to force down fees for all but the most successful funds: “As fees continue to eat away at precious returns, more institutions will balk at paying ‘alpha’ fees for ‘beta’ performance.”
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