The Alternative Investment Management Association

Alternative Investment Management Association Representing alternative asset managers globally

You are:

Institutions get satisfaction with hedge funds

Megan Green and Harlan Moeckler

State Street Corporation

Q3 2006


Alternative investments have steadily gained broader appeal among institutional investors, reaching far beyond the domain of U.S. foundations and endowments which constituted the early adopters of these strategies. All signs indicate that this will continue for the foreseeable future.

The rationale behind the success of alternative investments is investor satisfaction. According to the results of a recent study conducted by State Street Corporation in conjunction with the 2005 Global Absolute Return Congress (Global ARC), institutions give alternatives an astounding 100% satisfaction rate in helping them achieve portfolio diversification. The realisation of lower portfolio volatility and increased absolute returns were key factors behind the growing role of alternative investments in institutional investors’ portfolios.

The study was conducted in October 2005. Participants represented global attendees including corporate pension plans (18%), public and government pension plans (42%), and endowments and foundations (40%). According to Global ARC, the responding institutions collectively manage more than $1 trillion total assets in their investment portfolios. Other conference attendees, including asset managers, consultants and service providers, were not eligible to participate.

Increasing hedge fund holdings

Among its key findings, the study confirmed that institutional investors continue to increase their allocation to alternative investment vehicles. Nearly half of institutional investor respondents have 10% or more of their portfolios invested in hedge funds today. This represents an increase over results of State Street’s 2004 study, when just over a third of respondents said hedge funds represented 10% or more of their assets.

Figure 1: Percent of portfolio allocated to hedge funds
Institutions get satisfaction with hedge funds - figure 1 


For the first time, State Street also questioned respondents about the role of private equity in their portfolios. While fewer than a quarter of respondents had more than 10% of their portfolio invested in private equity, nearly half had allocated up to 5% and almost a third held between 5% and 10% of their portfolio in private equity assets.

Figure 2: Percent of portfolio allocated to private equity
Institutions get satisfaction with hedge funds - figure 2 


Most respondents indicated that these new allocations to both hedge funds and private equity will be at the expense of existing active and passive equity allocations, as was also found in the 2004 study.

Growing Comfortable With alternatives

The vast majority of respondents (81%) indicated that their investment boards and trustees are more comfortable with hedge funds than they were 12 months ago. These same boards also devote significant energy to alternative investments—more than half reportedly spend in excess of 15% of their time discussing these assets, primarily to evaluate new strategies and review existing managers.

Respondents all said hedge fund investments have met their expectations for portfolio diversification. Well over half also reported they were satisfied with the results of hedge funds in lowering volatility and raising the absolute return of their portfolio.

Figure 3: Hedge fund results vs expectations
Institutions get satisfaction with hedge funds - figure 3 


Adding alternative managers

Most institutional investors indicated that they plan to add new hedge fund managers to their line-up and two-thirds said they will hire more private equity managers in 2006. Almost half of survey respondents said they currently engage more than 10 direct hedge fund managers, and about as many said they invest with up to three fund of hedge fund managers. Nearly a third said they do not invest in fund of funds. On the private equity side, most said they utilise more than 10 managers.

Figure 4: Number of direct hedge fund managers used
Institutions get satisfaction with hedge funds - figure 4


Figure 5: Number of FoF managers used

Institutions get satisfaction with hedge funds - figure 5


Figure 6: Number of private equity managers used

Institutions get satisfaction with hedge funds - figure 6 


When asked to profile the most desirable attributes for a prospective manager, the respondents said managers most likely to be selected would have the following attributes:
• At least $200 million assets under management
• At least a one-year track record
• An independent administrator strikes their fund’s NAV
• They charge fees of 2 and 20
• They are willing to negotiate their ‘terms’

Separating alpha and beta

The results of this study also illustrate institutional investors’ growing appetite for distinguishing their managers’ performance in terms of alpha and beta. The vast majority of respondents said they selectively engage new managers for both alpha and beta, while only 59% said they were able to differentiate between these results.

For those respondents who said they could not separate a given manager’s alpha and beta results, 82% attributed this inability to a lack of tools and resources. Half of investors surveyed also said they do not use alpha porting techniques.

Figure 7: Separating alpha from beta
Institutions get satisfaction with hedge funds - figure 7


There is clearly a growing appreciation for distinguishing alpha from beta returns. Consequently, institutional investors are becoming more sophisticated in how they engage, compensate and monitor the performance of their asset managers. These asset managers will continue to be pressed not only to deliver absolute returns, but to substantiate their true alpha contributions.

Back to Listing

Main Menu

  1. Home
  2. About
    1. Our Core Objectives
    2. Meet the team
    3. AIMA Council
    4. Global Network
    5. Sponsoring Partners
    6. Opportunities at AIMA
    7. AIMA’s 25th anniversary in 2015
  3. Join AIMA
    1. Benefits of Membership
    2. Application form
  4. Members
    1. AIMA DDQs
    2. AIMA Annual Reports
    3. AIMA Governance
    4. AIMA Logo
      1. Policy note
    5. AIMA Members' List
    6. AIMA Review of the Year
    7. Committees and Working Groups
    8. Weekly News
    9. Update Profile
  5. Investors
    1. AIMA Investor Services
    2. AIMA Members' List
    3. Investor Steering Committee
  6. Regulation
    1. Brexit
    2. Key topics at a glance
    3. Asset Management Regulation
      1. EU Asset Management Regulation
        1. AIFMD
        2. European Capital Markets Regulation
        3. MiFID / MiFIR
        4. UCITS
        5. European Venture Capital Directive
        6. Shareholder Rights Directive
        7. European Long Term Investment Fund Regulation
        8. Loan Origination Funds
        9. Capital Raising
        10. AIFMD-Related Events
      2. US Hedge Fund Adviser Regulations
        1. Registration and Reporting
        2. Incentive-Based Compensation
        3. JOBS Act
      3. Asia Pacific Asset Management regulation
      4. Other Jurisdictions’ Asset Management Regulation
      5. Private Placement Regime
        1. Canada
        2. Dubai
        3. Finland
        4. Germany
        5. Hong Kong
        6. Japan
        7. Saudi Arabia
        8. Sweden
        9. United Arab Emirates
      6. Systemically Important Financial Institutions ('SIFIs')
      7. Remuneration
        1. UK
        2. United States
        3. CRD IV and CRR
        4. AIFMD
        5. MiFID
      8. Shadow Banking
      9. Volcker Rule
      10. Other
      11. Systemic Risk Reporting
      12. Dealing Commission
      13. Corporate Governance
      14. Securitisation
    4. Markets Regulation
      1. Algorithmic and High Frequency Trading
        1. EU Automated Trading
        2. US Automated Trading
      2. Benchmarks
      3. Capital Markets Union
      4. Derivatives/Clearing
        1. BCBS - IOSCO
        2. EMIR
        3. Dodd-Frank Act Title VII
        4. Hong Kong
        5. MiFID II / MiFIR - Derivatives
        6. Singapore
      5. Market Abuse
      6. MiFID II / MiFIR
      7. Position Limits
        1. MiFID II - Commodities
        2. CFTC Position Limits
      8. Recovery and Resolution
        1. EU
        2. CPSS-IOSCO
        3. Financial Stability Board
      9. REMIT
      10. Securities Settlement
      11. SFT reporting & transparency
      12. Short Selling
    5. Tax Affairs
      1. Automatic Exchange of Information (AEOI)
        1. FATCA
        2. EU - AEFI
        3. OECD - Global Standard on AEFI
      2. Australia - Investment Manager Regime (IMR)
      3. Base Erosion - Profit Shifting (BEPS)
      4. FIN 48 and IAS 12
      5. Financial Transaction Tax (FTT)
      6. UK Investment Management Exemption (IME)
      7. UK Offshore Funds Regime
      8. Other
    6. AIMA's Policy Principles
    7. Search
    8. Resources
      1. Guidance Notes
      2. Noticeboard
        1. AEOI: FATCA and other regimes
        2. AIFMD
        3. Algorithmic and High Frequency Trading
        4. Bank/Capital Regulation (including NSFR)
        5. BEPS
        6. CFTC Registration and Exemptions
        7. Corporate Governance
        8. Dealing Commission
        9. Derivatives
        10. FTT
        11. MiFID / MiFIR
        12. Other Hot Asset Management Topics
        13. Other Hot Markets Topics
        14. Other Hot Tax Topics
        15. Position Limits
        16. Trading
        17. UCITS
        18. UK Partnership Tax Review
        19. US State and Local Taxes
        20. Volcker Rule
      3. Hedge Fund Manager Training
      4. Quarterly Regulatory Update
      5. Webinar Programme
      6. Regulatory Compliance Association
        1. About the Regulatory Compliance Association
        2. RCA Curricula and initiatives for alternative investment firms
        3. Meet the regulators and Sr. Fellows
  7. Education
    1. Research
      1. AIMA Research
      2. Industry research
      3. Surveys
        1. 2016 Global Hedge Fund Survey with KPMG and the MFA
        2. Private Credit
    2. AIMA Journal
      1. Recent issues
      2. Search AIMA Journal articles
      3. AIMA Journal archive: 2010-2012
    3. '25 Years in Hedge Funds'
      1. Introduction - AIMA's global mantra
      2. How the hedge fund industry has evolved over the last 25 years
      3. How the regulatory landscape has changed for hedge funds
      4. Separating fiction from reality: The most common and persistent hedge fund myths
      5. The next five years - where is the hedge fund industry headed?
      6. Virtual roundtable - Leading figures from the hedge fund industry look ahead to 2020
      7. Learning the lessons from the past
      8. Accessing hedge funds: how ‘solutions’ are the new FoHFs
      9. 'Big data': The growth of the global hedge fund industry
    4. "The Case for Hedge Funds"
      1. Global Hedge Fund Industry Paper: The value of our industry
      2. The Value of the Hedge Fund Industry to Investors, Markets and the Broader Economy: Research commissioned by AIMA and KPMG
      3. The Evolution of an Industry: KPMG/AIMA Global Hedge Fund Survey
      4. Contributing to Communities: A global review of charitable and philanthropic activities by the hedge fund industry
      5. Beyond 60-40: The evolving role of hedge funds in institutional investor portfolios
      6. The Cost of Compliance: Global hedge fund survey by AIMA, MFA and KPMG
      7. Capital Markets and Economic Growth: Long-term trends and policy challenges
      8. Apples and Apples: How to better understand hedge fund performance
      9. The Extra Mile: Partnerships between hedge funds and investors
      10. Key articles by AIMA on the case for hedge funds
    5. AIMA Guides to Sound Practices
    6. AIMA guides for institutional investors
    7. Transparent, Sophisticated, Tax Neutral - The Truth About Offshore Funds
    8. CAIA Association pages
      1. Fundamentals of Alternative Investments
    9. Regulatory Compliance Association pages
      1. About the Regulatory Compliance Association
      2. RCA Curricula and initiatives for alternative investment firms
      3. Meet the regulators and Sr. Fellows
    10. Certified Investment Fund Director programme
    11. Services to Start-up Managers
    12. Glossary
    13. Cyber Security Resources
  8. Events
    1. AIMA Events
      1. AIMA's Global Policy and Regulatory Forum
        1. 2016 Forum
      2. AIMA Spotlight 2016
      3. AIMA APAC Annual Forum 2017
        1. Agenda
        2. Registration
        3. Sponsors and Supporting Organisations
        4. Logistics & Other Information
    2. AIMA webinars
    3. Industry events
  9. Media
    1. Press Releases & Statements
    2. AIMA's blog
    3. Media Coverage
      1. Articles by AIMA
        1. Archive
      2. AIMA in the news
      3. Video interviews
      4. Industry news
    4. Media Contacts
    5. Press Materials

Sub Menu