Stronger due diligence will come: hedge fund panel

By James Langton

As more money is expected to flow into hedge funds, institutional investors will focus on implementing stronger due diligence capabilities,
a hedge fund industry panel hosted by Dow Jones Indexes said today. As for funds themselves, the panel noted that hedge funds should beware of an inflationary environment in 2007.

As more institutional investors turn toward alternative investment vehicles such as hedge funds, they will demand more transparency and risk management tools in making their asset-allocation decisions, said John Prestbo, editor and executive director of Dow Jones Indexes, adding that style-pure hedge fund indexes may provide one solution.

“Institutional investors, like pension funds and endowments, have become increasingly educated on what’s available to them. The need for risk-control and due diligence measures remains the same — if not greater,” Prestbo said.

“Most institutional investors are trying very hard to get their arms around proper due diligence and find it very difficult to find consultants who can provide them with objective information. Therefore, they have been looking internally to develop processes that address these needs; this is problematic as most trustees do not have the experience to pick appropriate managers,” noted Daniel Strachman, managing partner of A&C Advisors LLC, a strategic consulting firm. “Institutional investors need to focus on due diligence, which is going to be the topic du jour in the months ahead, especially in light of recent losses sustained by some funds.”

Looking at fund returns, Michael Litt, partner and multi-strategy portfolio manager & strategist at FrontPoint Pointers, a Connecticut-based multi-strategy hedge fund, cautioned hedge fund managers and investors that the Federal Reserve’s next steps in cutting or maintaining interest rates, the continued importance of China’s economy in the global markets, and geopolitical factors could result in an inflationary environment in the year ahead.

“These events will bear the most impact on long bond and real return bond strategies,” Litt said. “But the return of volatility to the financial markets will come as a surprise to many.”