GLOBAL - Institutional investors are changing the world of hedge fund and increased disclosure might eventually lead to a decrease in outperformance, State Street has said.
In its latest Vision report on hedge funds, State Street suggested regulatory changes "will bring greater transparency but perhaps at the cost of outperformance".
"More and more institutional investors are investing in hedge funds and they are bringing with them new sets of expectations and standards regarding risk and fees, so the hedge fund industry is changing - it is maturing," said Chris Woods, senior managing director for absolute return strategies at State Street Global Advisors (SSGA).
At the same time, Woods's colleague Gary Enos, who is executive vice president and heads State Street's alternative investment team, argues there is a fine line between disclosure and giving away too much about your investment strategy with which "hedge fund managers have a personal relationship".
"Hedge fund managers are taking a more conservative approach when it comes to institutional investors," explained Enos.
"But those that go into the institutional business will have to abide by the rules set up for them," said Enos.
That said, he believes the risk/return ratio of hedge funds would still compare favourably to other forms of alternative investments even if the rate of outperformance decreases.
While Woods suggests "high-net-worth individuals have moved on and are now investing in wine and art", State Street research indicates institutional interest in hedge funds is continuing to grow.
In a survey it conducted among pension funds and foundations with a collective assets of management of $1trn, two-thirds of institutional investors said they were allocating more than 5% of their portfolio to hedge fund strategies while in the year prior, only half of all institutions said the same thing.
The number of institutions without any hedge fund allocation has also decreased from 16% to 4%.
The study also suggests that soon up to 10% of all institutional money worldwide will be invested in hedge fund strategies.