Infovest21 Survey: 60% of institutions surveyed see hedge funds as a possible solution to underfunding problems

In its just-released institutional investor survey, Infovest21 found that almost 60% of the respondents say hedge funds are a possible solution for their underfunding problem.

Lois Peltz, president of Infovest21, noted, “Institutional investors are primarily looking to hedge funds for non-correlated returns. Potential for higher returns, diversification, and downside protection were cited to a lesser extent.”

Other findings of the survey are:

Hedge funds are a mainstream investment

The average institution allocated 29.2% to hedge funds while funds of funds are allocated 11.4%. This represents a 2.3% increase for hedge funds but no change for funds of funds compared with 2009 levels.

Over the next 12 months, the institutions expect their allocations to increase to 35.5% for hedge funds and 16.2% for funds of funds.

Almost one-half of the respondents have been allocating to hedge funds for over ten years.

Over 40% of the respondents said they are using equities to fund hedge funds. Fixed income and cash were each cited by almost 30%.

Allocate most often to long/short equity and multi-strategy….more considerations being given to managed futures and distressed
Of the 23 strategies asked about, institutional investors allocated most frequently to equity long/short and multi-strategy. Respondents, however, had mixed views on multi-strategy funds with almost 40% saying their view was dependent on the asset allocator.

Country specific funds, activists, asset based lending and mortgage-backed securities are out-of-favor while managed futures and distressed are being considered for the first time by a large number of institutional investors.

Consultant’s specialty expertise
In selecting a consultant, almost two-thirds of the respondents said the primary selection factor was specialty expertise followed closely by experience.

Fraud remains major concern
Institutions’ largest concerns with hedge funds are fraud and then poor performance.

Fee pressure to continue
Downward pressure is likely to continue on hedge fund fee structures as almost 40% of the institutions said the management fee is too high while 30% said the incentive fee was too high.

Competitive products
If the institutional investor decided not to use hedge funds going forward, they would replace them most often with private equity. In descending order, hedge fund replication products, commodities, real estate and hedge fund indices were also cited.

Contact Infovest21 for the full survey results, general@infovest21.com or call 212-686-6440