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Institutions Want Portable Returns

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NEW YORK (–A survey by State Street Corp. of institutional investors with combined assets of more than $1 trillion indicates that most want to tailor their portfolios by using methods to separate market, or beta, returns from above-market alpha.

Of study participants, 81% said they engaged new managers for both alpha and beta returns, and a majority (59%) said they are able to differentiate between a given

manager’s market and above-market results. Among those who said they could not

differentiate, 82% attributed this inability to a lack of tools or resources.

State Street conducted the poll late last year together with the 2005 Global Absolute Return Congress. Respondents included global corporate pensions (18%), public and government pensions (42%) and endowments and foundations (40%).

“As investors become more aware of the benefits of separating alpha and beta, asset managers who can provide a wide range of beta exposures and interchangeable alpha sources are uniquely positioned,” said Jane Tisdale, managing director of hedge fund strategies for State Street Global Advisors, in a statement.

“Access to customizable resources such as alpha porting techniques offer increased transparency in measuring and rewarding performance and allow the flexibility to increase portfolio diversification with a low tracking error,” she said.

Portable alpha methods, while not new, have become more diverse and widespread in recent years. Their key attraction is adding absolute returns to otherwise traditional portfolios.

The State Street survey also showed that in the past year a large majority of investment boards and trustees (81%) have become more comfortable with investing in hedge funds, and most institutions intend to add new hedge fund and private equity managers to their current lineup in the next 12 or so months.

Eighty-six percent of the respondents said they plan to add new hedge fund managers, while 67% expect to hire new private equity managers.

Gary Enos, executive vice president and head of State Street’s alternative investment servicing business, said customer satisfaction goes a long way toward explaining the proliferation of hedge funds.

“Our study reveals hedge funds are meeting institutional investors’ expectations with an astounding 100% satisfaction rate in achieving portfolio diversification as well as high marks for lowering portfolio volatility and increasing absolute return,” he said in a statement.

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