Hedge Fund Managers Should Expect Greater Scrutiny and Transparency Demands From Institutional Investors

Institutional investors appear committed to hedge fund investing, but hedge fund managers will face wider-ranging and more in-depth scrutiny of operations and investment processes. Hedge funds fulfilling performance expectations and embracing transparency will be those that retain and capture assets, according to a global survey report by SEI and Greenwich Associates.

The survey report, entitled "Hedge Funds Under the Microscope: Examining Institutional Commitment in Challenging Times," points to a need for greater transparency and enhanced client reporting and communications from hedge fund managers. These are especially needed in the wake of changing institutional expectations brought on by the worst year on record for hedge fund performance. SEI collaborated on the survey with Greenwich Associates, initially polling institutional investors in Continental Europe, the United Kingdom, and United States at the end of August. As the financial crisis deepened, the firms re-interviewed respondents in November, to help gauge the impact of market turmoil on institutional attitudes and plans concerning hedge funds.

The initial survey revealed that over 90 percent of institutions polled either increased or maintained their allocations to hedge funds in the last two years. That sentiment remained largely unchanged in November when three out of four investors re-surveyed said they had taken "no action" in response to the crisis. When asked why, 83 percent of those taking no action indicated their commitment to hedge funds has remained unchanged. The remaining respondents had investments that were subject to lock-up provisions. At the same time, while the percentage planning to increase target allocations dropped significantly between the first- and second-round surveys (signaling a period of reassessment), only one institution reported lowering its target hedge fund allocation between the first and second rounds.

"The silver lining for hedge fund managers is that institutions appear committed to hedge funds as an asset class," said Phil Masterson, managing director for SEI's Investment manager services division, in a press release. "However, it's not an unconditional commitment. Hedge fund managers must recognize and react to the changing expectations of their institutional clients. Greater transparency and enhanced client reporting and communications-along with fulfilling investor performance expectations-will be the pillars of a hedge fund manager's success," he said.