| Amaranth what? Most hedge funds meet investors' expectations |
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| 18/02/2007 | |
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The Amaranth blow up was just a hiccup. That seems to be the conclusion of a survey by the Bank of New York which shows one consistent result: to date, hedge funds have generally met institutional investors' expectations. Only 3% of those surveyed say that their hedge fund has underperformed versus their expectations. The vast majority, 72%, report that their hedge fund has performed within 1% of their target expectations and 25% say that their hedge fund has exceeded their return target by 1% or more. When asked about the potential of reducing hedge fund allocations, institutions expressed broadly that they have no intention of doing so. The survey, the second of its kind, is based on more than 100 interviews with institutional investors, hedge funds and fund-of-hedge-funds around the world. Those in the survey, including endowments, governmental authorities and pension plans, had a minimum of $100mn in assets. Defined contribution schemes were not included, with the exception of the Australian superannuation system. Here to stay In other findings, institutional investors worldwide had invested £361bn in hedge funds by year-end 2005, representing 2% of total global institutional assets. "Our research suggests that only 15% of institutions have a hedge fund investment, although this varies substantially by region and type of institution. For example, in the United States half of all non-profits, including endowments and foundations, are invested in hedge funds, while among corporate defined benefit plans that rate is 10%." By comparison, in the United Kingdom only 3% of DB plans are currently invested in hedge funds. Some institutions are starting to use hedge funds as part of a 'portable alpha' program, which are increasingly being used as a replacement to existing domestic equity mandates. "Often, the institution uses derivatives to replace the beta return of an index such as the S&P 500 and then invests in a basket of hedge funds or fund of hedge-funds, seeking to create a very low volatility market-neutral return stream." For the most part, interest in portable alpha remains circumspect, according to the study. What are the main sources of capital into hedge funds? According to the survey, the main drivers are a combination of decreasing interest in constrained mandates and traditional strategies where beta exposure dominates returns in addition to reduced allocations to fixed-income and equities, which have historically benefited from over-allocation, and finally, the replacement of traditional equity managers with portable alpha programs. Given this background, David Aldrich, Managing Director, at the Bank of New York, expects money flows into hedge funds to exceed $1tr by 2010, nearly half of it making its way into fund-of-funds. "Within the last two years, the definition of a hedge fund has changed from a risk management tool to an alpha generating one," says Aldrich. Indeed, last year the Credit Suisse Treemont Hedge Fund Index returned 13.86%. The survey's conclusion of continued growth in this asset class is paralleled by another by Watson Wyatt, which conducted 30 searches in 2006 on behalf of its UK pension clients looking to invest in hedge funds. That compares to no searches in 2004, according to Watson Wyatt. VB |
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