Investors still like hedge funds

Date: Thursday, November 13, 2008
Author: Morningstar.com

Despite all the complaints from politicians about hedge funds and the negative press coverage they have been receiving over the past few months, they are set to play a greater role in many investors' portfolios in the years ahead. According to a survey by Morningstar, 25 per cent of financial advisors polled and 30 per cent of institutions expect hedge funds to become somewhat or much more important in the future.

Meanwhile, pension funds are diversifying their assets out of equities and into other investment classes, according to the UK's National Association of Pension Funds. Among 294 defined benefit funds surveyed with a total of GBP450bn in assets, the proportion of assets invested in equities has fallen from 59.7 per cent in 2006 to 49.9 per cent this year.

As an alternative to equities, pension funds are choosing to diversify into other asset classes, and their investment in hedge funds has more than doubled as a share of total assets, from 1 per cent in 2006 to 1.9 per cent this year.

This seems to augur well for the hedge fund industry, but investors do have concerns they want to see addressed. More than half of the investors surveyed by Morningstar cite lack of liquidity as a reason to hesitate in allocating assets to hedge funds, and both advisors and institutions highlight a lack of transparency and high management and performance fees.

Willingness to address these concerns can help hedge fund managers to capitalise on what appears to be an extensive fund of goodwill and understanding of the benefits that investors can bring to investors' portfolios. Who know, it might even attract some favourable media coverage.