GLOBAL - Transparency and liquidity risk have overtaken poor performance as the top concerns for institutional investors with hedge fund allocations, research shows.
A global survey from SEI and Greenwich Associates showed institutional investors remained committed to hedge funds despite investment scandals, market dislocations, and increased regulatory scrutiny.
It shoed 80% did not plan to change their hedge fund allocation in the next 12 month and 15% intended to increase their investment.
The report, The Era of the Investor: New Rules of Institutional Hedge Fund Investing, also found more than 70% had requested more detailed information from managers than they did a year ago.
The type of information sought ranged from counterparty and leverage exposure data to sector and position-level detail. More than 80% of the respondents reported a focus on funds' valuation methodologies.
Investors also continued to exert influence on fee structures, as nearly one in five respondents reported negotiating fee arrangements different than the standard "2 and 20" for single-manager funds and "1 and 10" for funds of hedge funds over the last year.
SEI said the report showed the need for "hedge fund managers to institutionalise responses to transparency demands and to demonstrate clear sources of alpha to retain and gain assets among an increasingly demanding institutional investor base".
SEI investment manager services division managing director Phil Masterson said investors remain committed to hedge funds - but that commitment comes with increased expectations.
He added: "The balance of power has clearly shifted and managers must meet the growing demand for transparency and increase their focus on operational effectiveness if they want to be successful in this ‘era of the investor.'"
SEI said institutional investors were focused on a manager's ability to identify and clearly explain the alpha source from which the performance is derived. It added another critical factor in manager selection was compliance infrastructure, with nearly 50% citing it as "very important."
Independent administration and a separation of investment management and operations management roles were also identified as high-ranking factors in manager selection.
The survey revealed investors were also concerned with issues such as liquidity risk, valuation methodology, and whether performance characteristics are in line with stated strategies.
This week's edition of Professional Pensions is out now
Collective defined contribution (CDC) schemes will need clear and transparent governance frameworks, as well as effective communication strategies, to be a success, the Work and Pensions Committee (WPC) has been told.
The aviation sector's constant evaluation of mistakes to improve safety should be applied to defined benefit schemes, as too many are making the same mistakes again and again, latest research shows.
A month of strikes are due to hit 64 universities from tomorrow over major reforms to the Universities Superannuation Scheme (USS).