Bucking Conventional Wisdom, Investors Largely Happy with Hedge Funds

(October 15, 2009) – Countering conventional wisdom, a recent study asserts that institutional investors are, in fact, more satisfied with their hedge fund holdings than they were a year ago, despite, on average, large losses.

London-based Preqin, surveying 50 global pension plans, endowments, foundations, and insurers, says that 40% of respondents were unhappy with hedge fund investments last October, a month after the collapse of Lehman Brothers and AIG caused global markets—and hedge funds with them—to collapse. The figure a year on, however, is only 27%.

According to the survey, 62% of investors state that their hedge fund holdings have met their expectations, while 11% claim that investments have exceeded them. As a result, 80% of those surveyed plan to maintain their current hedge fund allocations, leaving 20% who plan to reduce exposure.

The past year, however, has caused a shift in hedge fund selection criteria among institutional investors. While 45% claim that they have made no change to their selection criteria, the remaining 55% largely are looking at liquidity and fund transparency when selecting fund managers. Surprisingly, lower hedge fund fees—long thought to be a bugbear of institutional investors—did not rank near the top of hoped-for changes.

The survey, conducted in September, comes on the heels of Shell UK’s US$14 billion pension fund’s prominent move into this asset class. According to reports, Shell plans to move upward of 5% of its fund into alternatives—which, within Shell, will not include real estate and private equity, which exist as standalone asset classes—bringing total asset allocation to 40% equities, 40% fixed-income, 10% property, and 5% private equity.

“Following the 2009 review, the Trustee is considering investing a small part (5%) of the fund in alternatives investments,” wrote Shell UK’s Trustee board in a newsletter to pensioners. “Well-chosen hedge funds can provide diversification benefits for the fund in volatile markets. The Trustee has agreed changes to the underlying asset in each asset class and to invest a larger proportion of the fixed income in assets that will give some protection from the effects of inflation.”