institutional news

Hedge fund allocations on the up, says Russell Hedge fund allocations among global institu­tional investors are still expected to rise, al­beit at a slower rate than in recent years, ac­cording to a survey compiled by Russell In vestments.

Overall, allocations to hedge funds , now 4.2% of total assets, will rise to 5. 7% in the next two years as most institutions boost their allocations to alternatives in general with areas such as infrastructure and private equity also gaining interest. By global re­gions, the strongest allocation to hedge funds on a percentage basis is in Japan/Asia , where hedge funds are reported to account for 6% of total assets as of 2009.

Russell completed its survey during the first month of 2010 with 119 firms respond­ing, representing $1.3 trillion of assets under

management. Trends uncovered in the re­sponses include a move to allocating scarce internal resources to evaluate hedge funds, separate account investing and institutional pressure to drive down fees.

Russell detected some desire to increase re­liance on customised account structures ac­cessing hedge fund managers, with expected usage increasing from 6% in 2009 to 15% by 2012. The benefits of managed accounts are particularly in the an~a of transparency, but insufficient assets in any one fund may not be enough for some investors to wield "sepa­rate account clout" and some separate ac­count structures may add unacceptable fidu­ciary or operational risks for the plan sponsor.

Previous surveys showed that the average

allocations to hedge funds had increased to about the 7% to 8% range in North America and Europe and as high as 9% to 10% in Ja­pan/Asia. These increases were driven by both the capital invested and increased lever­age, which contributed to higher values in a rising market.

The most hedge fund disenchantment was found in Europe, according to Russell , where allocations may not return to peak levels for some time. Hedge funds are expected to re­bound faster in North America and Japan/ Asia . Key to that future growth is the concept of fee 'breakpoints' arising in hedge funds, similar to the tradition of mutual funds. Re­spondents to the Russell survey anticipate achieving such a breakpoint in hedge funds over the next year or two.

July/August 2010