State Street HF Study Shows Institutional Investors Remain Committed to HF's

Date: Thursday, March 26, 2009
Author: State Street

Nearly Half Plan to Increase Hedge Fund Allocations in 2009

Increased Focus on Accurate Valuations and Transparency Remains
Paramount

 

Boston, March 26, 2009 – State Street Corporation (NYSE: STT), the
world’s leading provider of financial services to institutional
investors, released today its fifth institutional investor hedge fund
study. State Street conducted the study late last year in conjunction
with the 2008 Global Absolute Return Congress (Global ARC). Asset owners
participating in the study included representatives from global public
and government pensions (37 percent), corporate pensions (19 percent),
endowments and foundations (29 percent), and insurance companies (5
percent) with an estimated $1 trillion in total investable assets.

 

The results of State Street’s study indicate that 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. Further, 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. The majority of funding for new hedge fund positions is
expected to come from equity allocations (80 percent), as compared to
2007 when two in five institutions (39 percent) planned to draw from
bond allocations to fund new hedge fund positions.

 

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.

 

Increased Focus on Accurate Valuations, Greater Transparency

 

Among the challenges arising from the recent market volatility has been
the growing difficulty in accurately valuing derivatives and other
complex financial instruments. As a result, more institutions reported
that accurately valuing hedge fund holdings can be problematic (77
percent versus 55 percent in 2007). Two-thirds of institutional
investors (64 percent) attribute the accurate valuation of their hedge
fund holdings to the use of an independent fund administrator,
illustrating the valuable role that third-party providers can play.

 

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.

 

By all accounts, institutional risk management programs are growing more
sophisticated. While one-third of institutions place a greater emphasis
on qualitative analysis when monitoring the ongoing performance of
alternative investments, half place an emphasis on both qualitative and
quantitative analysis. Further, nearly two-thirds (61 percent) of
institutional investors either intend to (17 percent) or already are (44
percent) aggregating alternative investment risk exposures with other
portfolio exposures to gain a meaningful assessment of risk across their
portfolio.

 

“The recent unprecedented market volatility has prompted institutions to
increase their focus on risk management,” said Enos. “To address these
concerns and the increasingly difficult challenges inherent in the
financial markets, the hedge fund community and allied third-party
providers and administrators are stepping up efforts to develop and
expand risk management solutions for institutional investors.”

 

Investment Loss and Return Correlations

 

Institutions say the risk of investment loss presents the greatest
threat to hedge fund investing today (26 percent). This risk resulted
primarily because, while hedge fund indices outperformed equity
benchmarks (such as the S&P 500 Index) by more than 20 percent in 2008,
declines in hedge fund returns still disappointed. While slightly less
frequent, questions about hedge fund differentiation also remain, as
hedge fund managers work to innovate and traditional investment managers
continue to roll out hedge-like strategies. This year, 19 percent of
investors expressed concerns about the correlation of hedge fund returns
with those of traditional investments, as compared to 23 percent a year
ago.

 

For a copy of the State Street hedge fund research study, please contact
publicrelations@statestreet.com.

 

State Street Corporation (NYSE: STT) is the world's leading provider of
financial services to institutional investors, including investment
servicing, investment management and investment research and trading.
With $12 trillion in assets under custody and $1.4 trillion in assets
under management at December 31, 2008, State Street operates in 27
countries and more than 100 geographic markets worldwide. For more
information, visit State Street’s website at www.statestreet.com
<http://www.statestreet.com> .

 

This news release may contain forward-looking statements, as defined by
federal securities laws, including statements about the financial
outlook and business environment. Any such statements are based on
current expectations and involve a number of risks and uncertainties.
Important factors, including those mentioned in this news release, that
could cause actual results to differ materially are set forth in the
company’s 2008 annual report and subsequent SEC filings. They include
risks and uncertainties relating to the pace at which State Street adds
new clients or at which existing clients use additional services, the
value of global and regional financial markets, and the dynamics of the
markets State Street serves. State Street encourages investors to review
its annual report and SEC filings in conjunction with this announcement
and prior to making any investment decision. The forward-looking
statements contained in this news release speak only as of the date of
release, March 26, 2009, and the company does not undertake to revise
those forward-looking statements to reflect events after the date of
this release.

MEDIA CONTACT:

Sarah Gardiner

(416) 644-2907