Risk concern driving cash to hedgies

INSTITUTIONAL investors are planning to increase their allocations to hedge funds in the next year, a new report by SEI and Greenwich Associates shows.

Fifty-four per cent of 97 investors surveyed said risk management was the greatest appeal of the asset class.

The survey shows that hedge funds are increasingly seen as a mainstream asset class, rather than being the preserve of a few eclectic risk-takers.

In line with concerns about risk, “accessing non-correlated strategies” came out as a top priority at a time when asset classes are unusually correlated with one another.

Eighteen per cent also said that reducing their portfolio’s volatility was a reason to use hedge funds, defying the industry’s reputation as being primarily for professional speculators with high risk tolerance.

However, investors still have doubts about the less regulated aspects of hedge fund investment. Seventy per cent of investors say that transparency is a concern, and 58 per cent say liquidity is their main worry.

Many hedge funds do not have to give daily valuations to their investors as do conventional funds, which can make it harder to withdraw cash at short notice.

But even as investors plan to push more money into hedge funds, they are staying price-sensitive: 13 per cent say that “value for money” is a major challenge, up from four per cent last year.

•Meanwhile, figures out yesterday from the EDHEC-Risk Institute show that the  most successful hedge fund strategies last year were those focused on distressed securities and convertible arbitrage.

Short selling took the last place for returns, with short hedge funds having delivered a 16.9 per cent loss on average. Of that loss, 5.5 per cent occurred in December, when the stock market rallied strongly.