GLOBAL - Institutional investors are increasingly worrying about hedge funds' ability to meet performance targets, while concerns over transparency and the lack of differentiation between strategies remain, a new report has found.

According to the second part of the fifth annual global survey of institutional hedge fund investors published by SEI, institutional investors have growing concerns about the lack of transparency in hedge fund portfolios.

However, even though transparency remained one of investors' chief concerns, SEI noted in its survey that, for the first time in four years, respondents did not rank that particular issue as the biggest challenge in hedge fund investing.

The report said: "This suggests hedge fund managers have increased their openness to the point where investors have become more comfortable with the depth and breadth of information provided."

SEI said current trends on the issue of transparency reflected the maturation of alternative investing.

"Clearly," the report said, "fund managers have accepted the need for greater transparency and are advancing their reporting by degrees and over time.

"With heightened disclosure, institutional investors have grown more comfortable with alternative investments. Yet, at the same time, institutions are becoming increasingly sophisticated in their expectations and their scrutiny."

The main difficulty for institutional investors is how to select the right hedge fund manager and conduct due diligence, according to the survey.

The report said institutional investors found it increasingly difficult to differentiate hedge funds using similar strategies and methods, and argued that there were too many "look-alike strategies" in the industry.

While this perception poses a major challenge to fund managers, it also points to a clear opportunity for those that can clearly articulate and differentiate their strategies and methods, SEI said.

The survey also found that institutional investors have changed their methods when conducting due diligence.

Investors have shifted towards more intensive and robust diligence, with onsite meetings sometimes involving investment committee members, SEI said.

Others in funds of hedge funds are even visiting underlying fund managers.

According to the survey, investors are more likely to request additional detail on topics ranging from investment and valuation methodologies to liquidity and counterparty risk.

In the first of the surveys published last month, SEI noted that investors had grown more willing to invest in hedge funds, with more than one-third of respondents planning to increase target allocations over the next 12 months.