State Street's Survey Anticipates Growth In Hedge Fund Allocations

Although there has been a moderate decline in overall allocations to hedge funds, the majority of institutions intend to increase or maintain current hedge fund allocations over the next 12 months, according to a study by State Street Corporation. The

By None

Although there has been a moderate decline in overall allocations to hedge funds, the majority of institutions intend to increase or maintain current hedge fund allocations over the next 12 months, according to a study by State Street Corporation.

The study indicates that turbulent financial markets have not caused major shifts in institutional asset allocations. Three quarters of institutional investors said they do not plan to modify portfolio allocations.

The results of State Street’s 2009 hedge fund study show a moderate decline in overall allocations to hedge funds, with institutions allocating more than 5% of their portfolio to hedge funds decreasing from two-thirds (68%) in 2007 to one half (51%) in 2008.

Nevertheless, most institutions intend to either increase (49%) or maintain (39%) their allocation to hedge funds in the next year. The majority of funding for new hedge fund positions is expected to come from equity allocations (80%), as compared to 2007 when two in five institutions (39%) planned to draw from bond allocations to fund new hedge fund positions.

Another encouraging sign for alternatives is increased institutional interest in private equity funds. Over half of institutions (53%) have allocated more than 5% of their portfolio to private equity funds, and half intend to increase their allocation to private equity over the next 12 months.

The survey also suggests that institutional risk management programmes are growing more sophisticated. While one-third of institutions place a greater emphasis on qualitative analysis when monitoring the ongoing performance of alternative investments, half place an emphasis on both qualitative and quantitative analysis.

Further, nearly two-thirds (61%) of institutional investors either intend to (17%) or already are (44%) aggregating alternative investment risk exposures with other portfolio exposures to gain a meaningful assessment of risk across their portfolio.

Hedge funds have not been immune to the extremely volatile market environment, says Gary Enos, executive vice president and head of relationship management and client strategy, alternative investment solutions, State Street.

While alternative investments, including hedge funds, largely outperformed traditional investments in 2008, negative returns understandably disappointed. Although hedge fund allocations declined slightly over the past year, we anticipate growth will resume later in 2009, as institutional investors continue to focus on diversification and risk management.

The recent unprecedented market volatility has prompted institutions to increase their focus on risk management, continues Enos. To address these concerns and the increasingly difficult challenges inherent in the financial markets, the hedge fund community and allied third-party providers and administrators are stepping up efforts to develop and expand risk management solutions for institutional investors.

L.D.

«