Investors focus on hedge fund correlations: survey

Accessing non-correlated strategies has emerged as the top institutional aim in hedge fund investing, according to a survey by SEI Knowledge Partnership and Greenwich Associates, reflecting a shift in objectives since the 2009 survey, when institutions reported diversification and absolute return as priorities.

According to SEI’s fourth annual global survey of institutional hedge fund investors, which included responses from 111 institutions, 30 per cent of respondents named exposure to non-correlated strategies as their number one goal in hedge fund investing, up from 24 per cent the year before.

The percentage of investors that said they invested mainly with the objective of lowering portfolio volatility also jumped, rising from 8 to 18 per cent.

Institutional investors are now emphasising the clarity of investment philosophy and risk management infrastructure when selecting hedge fund managers, according to the survey. In 2009, they placed the most weight on the quality of management teams in selecting hedge funds.

According to the survey institutions are not only maintaining, but strengthening, their commitment to hedge fund investing. With more than 54 per cent of the investors surveyed said they plan to increase target allocations to hedge funds in the next 12 months – over three and a half times the percentage giving that response in 2009.

Transparency demands have not abated. In fact, concerns with hedge funds’ level of disclosure have intensified. Nearly 70 per cent of investors name a lack of transparency as their biggest worry.

While respondents to the 2009 survey were focused on hedge fund valuation methods, more than three out of four investors said they also want more detail on sector-level positions, use of leverage and risk analytics.

Foundations and endowments represented nearly half of the respondents, with public pension plans representing 21 per cent. About 40 per cent of respondents had more than $1 billion in assets.

In the past year, the HFRI Fund Weighted Composite Index recovered all of the losses of the crisis, with the index up 30 per cent between its trough in March 2009 and the end of November 2010.

With an 8.48 per cent return ,the HFRI Fund Weighted Composite Index placed hedge fund returns on par with domestic stock indexes over the short term. During the past five years, however, the index produced an annualised return of 5.64 per cent, well ahead of the 0.98 per cent produced by the S&P500 Total Return Index.

Going back to the beginning of the past decade reveals an even more dramatic difference, where the S&P500 stayed flat and the HFRI doubled.

The third quarter of 2010 saw hedge funds gain a net $19 billion in new capital, the largest quarterly inflow since late 2007.