State Street Corporation has released the results of its institutional investor hedge fund survey. Survey respondents included global corporate, public and government pension plans, and endowments and foundations with combined investable assets totaling more than $1.2 trillion.
The results of the survey show that a majority of institutional investors intend to add to hedge fund holdings in their portfolios over the next three years as they strive for better risk-adjusted returns and broader diversification, according to State Street. However, investors also differ greatly on the preferred way to invest in this asset class.
“Given the uncertainty of the world’s financial markets, it’s no surprise that institutional investors are looking to hedge fund strategies to maximize their portfolios’ risk-adjusted performance,” said Gary Enos, executive vice president and head of alternative investment services for State Street. “The findings of our survey also support the trend that we have seen in which new entrants to the asset class choose the fund of funds approach, while those with more experience in this asset class continue to favor direct investing.”
According to the State Street survey, one-third of institutional investors responding to the survey have at least 10% of their portfolios invested in hedge funds today, while half intend to have 10% or more invested in alternative strategies by 2007. At the time, 16% said they were not invested in hedge funds, but all plan to have some allocation to the asset class by 2007. The largest increase will come from public and government pension plans, the survey found.
“Hedge fund investing is obviously here to stay,” said Enos. “As institutional investors become increasingly more familiar with hedge funds, it is important that we, as service providers, have the right solutions in place to meet this demand.”
More than half of the survey respondents said they prefer investing directly in hedge funds, rather than funds of hedge funds or investable hedge fund indices. Investors who began investing in the asset class over the last year (7% of survey participants), said they preferred only funds of hedge funds. Those who have been investing in hedge funds for a year or more said they prefer direct investing with single managers, with a combination of single manager and funds of funds as the second most popular approach, the survey found.