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Institutions make hedge funds focus on risk, cut fees - survey

Date: Friday, February 11, 2011
Author: Nishant Kumar, Reuters

Hedge funds are taking risk management far more seriously, cutting fees and increasing transparency to woo institutions that contribute the most assets to the $1.9 trillion (1.18 trillion pounds) hedge fund industry, a survey shows.

Preqin, which surveyed 60 hedge funds that collectively manage $95 billion in assets, said capital sourced from institutional investors had grown to 61 percent of hedge fund assets from about 45 percent in 2008.

Nearly half of the respondents said the amount of capital coming from institutional investors had increased since the financial crisis in 2008, a sign that confidence was returning to the asset class.

Nearly half of the respondents said the fact that institutions had invested more money had caused them to put in place tougher risk management controls. Some 42 percent also said the rising institutional base of clients had led to a reduction in the fees they charged on their funds.

"The consensus is clear: hedge fund managers are witnessing large inflows of capital from institutional investors, and are adapting their fund strategies and marketing accordingly," Amy Bensted, manager of hedge fund data at Preqin, said in a statement.

Hedge fund managers predicted institutional money will become more important to the industry over the next 12-18 months, with nearly 85 percent expecting a rise in the proportion of their assets coming from institutional investors over the period.

Hedge funds, started as a tool for the wealthy to earn big returns, are increasingly turning towards institutional investors, which have trillions of dollars of investable assets, as they look for larger investments and stable sources of capital.

Preqin also highlighted that smaller funds received less capital from institutional investors, with 70 percent of the respondents saying their biggest challenge in raising institutional capital was overcoming requirements that funds maintain a minimum level of assets under management.

"The mean AUM requirement of a hedge fund investor is around $320 million," the firm said, citing a study based on data from 2,500 institutional investors in hedge funds.