New York (HedgeWorld.com)– A Deutsche Bank survey of institutional investors confirmed what many in the industry have long suspected, namely that investment decisions are not much affected by hedge fund fees.
Investors select hedge funds mainly on the basis of the three P’s, namely philosophy, pedigree and performance, the survey indicates. Of the participants, 42% said they look for investment philosophy, 26% look for manager pedigree and 22% for performance.
By contrast, only 1% mentioned fees as an issue in assessing a hedge fund manager. This is the second year in a row that this survey showed fees to be unimportant.
The study is based on 376 alternative asset investors with more than $350 billion in combined hedge fund assets worldwide. Half the participants are funds of funds. Sixteen percent are family offices, 10% are endowments and foundations, 7% are banks and 5% are pensions. Somewhat less than two-thirds of the investment offices are in the United States, one third are in Europe and 5% are in Asia.
The study demonstrates sharp differences among investors but also some commonalities. Most investors (60%) take between two and six months to make a hedge fund allocation. But 37% have allocated in less than one month when they were required to make a quick decision–funds of funds and family offices in particular are likely to do this.
A one-year lock up is no problem for 81% of investors, but only 14% are willing to lock up their money for two years. Hurdle rates are uncommon, but high watermarks are required by 81% of investors.
Across all survey participants, 17% own equity in a hedge fund, but hedge funds that invest in other funds ask for equity stakes much more frequently. Among investors that own equity interest, 50% are hedge funds, 21% are banks and 17% are family offices. Funds of funds make up only 14% of equity holders.
On the risk management front, 57% of investors examine their hedge fund portfolio monthly, while 19% do this weekly and 14% quarterly. About half of the investors consider rebalancing their portfolios monthly, 28% consider quarterly and 12% annually.
Most (61%) receive limited transparency but 36% get full disclosure. The main reason for asking for additional transparency is to monitor risk and style drift. In this matter, too, hedge funds that invest with outside managers differ from other investors. They are more likely to demand full disclosure than funds of funds, family offices or banks. These, in turn, require full transparency more often than banks and endowments do.
While 65% of survey participants do not use structured products in their hedge fund portfolio, almost one-third of these plan to start using such features. Principal protection and leverage are the most popular instruments. Banks, hedge funds investing in other funds and insurance companies are most likely to use structured products.
When it comes to service providers, investors are looking for a lot of extras. Most want prime brokers to help them meet managers and to offer risk reporting and research. In fact, investors discover new managers primarily through word of mouth and prime brokers. They also would like administrators to offer more fund information and risk reports.
These results are from part two of the 2003 Institutional Survey on Alternative Investment Trends. The first part, on investor characteristics and expectations, became available in January Previous HedgeWorld Story.