Less than half of the 19 investors polled for this month’s Off The Record survey (eight respondents) allocate to hedge fund strategies.

A Swiss fund has the highest proportion allocated, 15%, while the average is 5.3%.

Of the 11 funds that do not allocate to hedge funds, six do not think they need these strategies in their investment programme, and six believe hedge funds are not sufficiently transparent. Five think the fees are high and badly structured. These were the main objections, as opposed to the complexity of the strategies, or the operational and business risk they might present. However, four investors said that hedge funds present too much reputation risk. An Austrian fund commented: “Our board doesn’t want to be identified with hedge funds.” The industry probably shouldn’t bet on these investors coming around: they split pretty evenly when asked if the industry had made meaningful progress towards meeting their concerns over the past five years.

Among the eight hedge fund investors, investment performance has the most influence on their fund’s view of hedge funds. Transparency, fraud and diversification benefits are also highly ranked. They are least concerned about funds’ capacity to take large allocations.

Nearly all respondents think that the hedge fund industry’s transparency has improved over the past five years, with just one stating that hedge funds are not more transparent. The results suggest that the industry is more willing to explain the details of their strategies, and to report performance, portfolio holdings and risk exposures more thoroughly and frequently – although one UK local authority fund said that “some hedge funds are slow to recognise the transparency requirements of pension funds”, and an Italian fund added that it can be difficult to get the total, and timely, disclosure required to ensure that “investments are compliant with the pension fund’s investment policies and regulation”.

In general, respondents feel hedge fund managers do enough to help them understand the data they report to them. However, a Dutch fund said “we force them to do so”, suggesting the process is not as straightforward as desired.

Most believe the hedge fund industry has adopted basic institutional requirements, such as independent administrators and auditors, over the past five years, but not as much as they would have expected. “Slow but sure progress”, is how a UK fund saw it. Just one respondent feels there is no improvement.

But beyond the basics, few think that the decision of some larger pension funds to allocate directly to hedge funds, rather than use intermediaries like funds-of-funds, has acted as an incentive for hedge funds to engage more closely with the pension fund industry. A Dutch fund said: “The hedge fund industry does not seem to notice the financial world has changed.”

Perhaps surprisingly, fees were low on the list of issues that influence respondents’ views of the hedge fund industry. With regard to experimenting with different fee structures, a Dutch fund said: “Some strategies are more suitable for performance fees than others.” A UK fund added: “We are flexible on fee levels and fee structure, but there is a general feeling that fees are too high, especially given [….] recent returns.”