GLOBAL - Institutional investors will be looking for stronger due diligence capabilities as more money is expected to flow into hedge funds, financial experts at a hedge fund industry panel hosted by Dow Jones Indexes agreed.

"The trend we're seeing now is that as institutions become more sophisticated in the hedge fund space, they will develop more highly specialized and targeted objectives", said John Prestbo, editor and executive director of Dow Jones Indexes. He added that one answer for the demand for more transparency and risk management tools may be style pure hedge fund indices.

"Most institutional investors are trying very hard to get their arms around proper due diligence and find it very difficult to find consultants who can provide them with objective information," agreed Daniel Strachman, managing partner of strategic consulting firm A&C Advisors LLC.

"Therefore, they have been looking internally to develop processes that address these needs; this is problematic as most trustees do not have the experience to pick appropriate managers."

At the panel, experts also cautioned hedge funds and investors that the next decision by the Federal Reserve on interest rates, the continued importance of China's economy and geopolitical factors could result in an inflationary environment for hedge funds in the year ahead.