Institutional Investors Plan to Increase Hedge Fund Allocations in 2009

A study by State Street Corporation indicates that the 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.

While the study results indicate a moderate decline in overall allocations to hedge funds, the majority of institutions report an intention to increase or maintain current hedge fund allocations over the next 12 months.

“Hedge funds have not been immune to the extremely volatile market environment,” said Gary Enos, executive vice president and head of relationship management and client strategy for State Street’s Alternative Investment Solutions team. “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 results of State Street’s 2009 hedge fund study show a moderate decline in overall allocations to hedge funds, with institutions allocating more than five percent of their portfolio to hedge funds decreasing from two-thirds (68 percent) in 2007 to one half (51 percent) in 2008. Nevertheless, most institutions intend to either increase (49 percent) or maintain (39 percent) their allocation to hedge funds in the next year.

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

Institutional investors also continue to emphasize transparency. Five out of six institutions (84 percent) expect more disclosure of hedge fund positions and nearly half (49 percent) anticipate more frequent reporting from hedge fund managers. Meanwhile, only a few (19 percent) currently receive some level of consistent transparency across hedge fund holdings.