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Investors to increase hedge fund allocation
23 May 2013
Investors are interested in allocating to smaller hedge fund managers, according to a new Aima survey
The Alternative Investment Management Assocation’s (Aima) Investor Steering Committee has published a new paper on the changing role of hedge funds in institutional investor portfolios.
The survey findings show that institutional investors are increasingly using hedge funds in their portfolios. This supports the growing trend away from traditional equities and bonds into alternatives.
According to the survey, investors use hedge funds to help them achieve risk-adjusted returns, diversification, lower correlations, lower volatility and downside protection.
The larger hedge fund managers tend to attract most institutional investment, but respondents said they were keen to explore ways of allocating to smaller and emerging managers.
One UK institutional investor said smaller managers charged “more reasonable” fees and were better able to generate higher returns with fewer assets. The investor added it is considering accessing some hedge fund strategies through liquid, passive replicators in order to reduce overall fees and enable dynamic allocation with no high-water mark issues.
The majority of investors said they plan to grow their allocations to hedge funds in the future and become more risk-tolerant as market conditions improve. Investors said hedge funds could attract more investments by charging lower fees, increasing transparency, making changes to governance and improving operational infrastructure.
On UK pension fund called for more independent directors on hedge fund boards. Some respondents said they would like to see hedge funds willing to take on fewer clients and build stronger strategic partnerships with them.
Many respondents said they do not view hedge funds as an asset class, but as an opportunistic investment. Pension fund respondents said they preferred the fund of one product offering over managed accounts because the former allows the same level of transparency and risk reporting as the latter but with less of the administrative burden.
The survey's respondents included pension funds, endowments, foundations and family offices across North America, Asia and Europe.