GLOBAL - Institutional investors place more focus on transparency and risk management than the actual performance of a fund when reviewing alternative investment managers, PricewaterhouseCoopers has revealed.

In its report entitled 'Transparency versus returns: The institutional investor view of alternative assets' PwC suggested while 72% of investors focus on performance when appointing an alternative investment manager, when it comes to reviewing manager selections, 41% focus on the quality of compliance and risk management process.

The global survey of 226 institutional investors and alternative investment providers, conducted by the Economist Intelligence Unit on behalf of PwC, showed a further 41% emphasized the importance of transparency when deselecting a manager, while performance was considered most important by just 40% of respondents.

The study suggested this change could be driven by "flattening returns", as investors "have tolerated weak governance and risk management in the past few years as returns have been good and the sector has been evolving".

But it warned now "returns are moderating and the sector has matured" it is expected investors "are going to be more exacting".

That said, the survey revealed investors have been slow in adopting new risk assessment processes, as 53% of respondents admitted they have not changed their risk management policies despite an increased allocation to alternatives.

This is also even though in the next three years 41% of respondents intend to increase their real estate allocation, 40% will increase investment in private equity, 35% plan to place a greater allocation to both infrastructure and commodities, and 33% expect to increase hedge fund investments.

Meanwhile, the study also highlighted a gap in perceptions about risk management, as 70% of investment firms rate themselves ‘effective' in the accounting and reporting of transactions, while 63% believe their valuation policies are effective yet investors appear to disagree, as just 18% of hedge fund investors think valuation policies are effective and only 16% believe IT security is good.

Of the regions covered by the report - the Americas, Asia and Europe - findings showed European companies are the least open about formal reporting and disclosure, with just 35% reporting on conflicts of interest compared with 60% in America, while only 19% of European firms report on back-office operations.

As a result, the study suggested investors would like to see more guidelines and regulation, as just 28% are satisfied with the existing regulatory environment for hedge funds, while 58% are unhappy with current rules on private equity.

However, the research showed the more mature economies are least in favour of increased regulation, with just 43% of US private equity participants supporting guidelines on reporting and just 35% in Europe.

Pars Purewal, UK investment management & alternatives leader at PwC, pointed out the alternatives industry has grown at an astonishing rate, but the development of the supporting infrastructure "does not appear to have always kept pace, and the channels of communication between providers and investors are not always as open and effective as they could be".

Therefore, when returns start to flatten, as they have in many asset classes, investors will focus more intently on operational infrastructure and providers will "need to do more to reassure and communicate with their clients", although clients would also "do well to engage better with investment firms and to ask the appropriate questions".

Purewal added: "Post credit crunch, it is reasonable to assume that investors will be looking for a much greater focus on governance, while levels of disclosure of processes and procedures will also accelerate as investors become more exacting."

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