Crisis reinforces ongoing trend toward alternative investing

The hedge fund industry’s insatiable thirst for market research will be temporarily quenched by an interesting new report from SEI and Greenwich Associates. The document, called “The Era of the Investor” contains results from the firms’ second annual survey of institutional investors (conducted in November 2009). According to the survey, the good news continues to roll for hedge funds, as 95% of the 96 institutional investors surveyed this year said they would either increase or maintain their hedge fund allocations over the next year.

Diversification remains the #1 reason to invest in hedge funds – followed closely by absolute returns. During 2009, the report found that transparency rose in importance with over 70% of respondents said they now request more detailed information from managers than they did a year ago. Since last year, poor performance has been overtaken by transparency and liquidity as the main sources of “concerns” about investing in hedge funds.

The report also notes that fee pressures have intensified as 20% of respondents reported having negotiated fee arrangements different that the standard ‘2/20′ for single-manager funds and ‘1/10′ for funds of hedge funds.

There were also some dramatic changes in some of the respondents’ biggest worries about hedge fund investing. “Failing to achieve primary objective” was cited by over half of institutions as a biggest worry this year. However, in the heady pre-Madoff days of August 2008, “not accomplishing stated goal” only kept 20% of respondents up at night. Even in November 2008, after the market fell off a cliff, only 40% of respondents said this was a “biggest worry”.

While corporate, public and government pensions had not yet reached their target hedge fund allocations, foundations and endowments’ actual allocations to hedge funds was already higher than they have targeted.

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