EUROPE - Insufficient knowledge of risk exposure and ineffective asset allocation policies are factors preventing institutional investors from reaping the diversification potential of hedge funds, a survey has claimed.
The EDHEC business school’s European Alternative Diversification Practices Survey said just 29% of European institutional investors appeared capable of carrying out a risk analysis independently of that provided by the fund manager, and only 48% were found to be able to integrate these risks in a global analysis of the risks of their assets.
Furthermore, it found that 45% of institutional investors had no allocation policy, and among the 50% following either a pure quantitative approach or a mix of quantitative and qualitative analysis, the majority opted for the mean/variance framework, which the survey said is ill-suited to the construction of hedge fund portfolios.
The EDHEC survey concluded that while 67% of institutional investors claimed to consider the risk factors to which their hedge fund investments are exposed in their allocation, only 30% distinguished between strategies, or by types of risks.
This finding was compounded by the survey’s discovery that 73% of European institutional investors manage an optimal mix of asset classes without distinguishing between passive and active products.
EDHEC’s survey found that 51% of European institutional investors are already exposed to hedge fund strategies, and that, on average, this exposure amounted to 7% of their global assets.
A shift away from the focus on alpha (absolute return) to a focus on beta (‘normal’ returns due to the risks taken) was also reported. In terms of investment vehicles, 74% of the institutional investors were found to take the diversified funds of hedge funds route, 37% invested directly in single hedge funds, and 2% via single strategy indices.
The survey received responses from 151 major European institutional investors representing, at 30 September 2005, more than e1trn of assets under management.
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