GERMANY - Institutional investors are now the “driving force” of the hedge fund industry, Jay Raffaldini of UBS told the SuperHedge conference in Frankfurt this week.

Investors complain about returns falling and alpha disappearing from the hedge business. “Returns may be falling but so is the level of risk being taken,” he said.

“If you look at the last few years compared with 10 years ago, we are having the same level of return per unit of risk undertaken,” said Raffaldini, who is managing director of UBS Alternative and Quantitative Investments, based in Stamford in the US.

The question he asked is - why is the level of risk falling? “This is due to the institutional investors becoming the driving force of the business.”

Institutional investors are conservative and risk averse and because if this, the hedge fund industry is changing, he maintained.

“Back in the 1990s, institutions accounted for only 5% of the hedge fund universe, now they are 60%. That is a huge increase.” Hedge funds’ response is to become conservative, he added.

Ten years ago, nine of the top 10 managers were macro, now only of the current top 10 is in this category, according to Raffaldini. The advent of the euro had an influence here, but more important in his view was the “dominance of the institutions”.

“It is no longer a case of investors saying ‘I want to give my money to a Tiger or Soros’,” he said. The game now is one of the institutions allocating their risk budgets across the different strategies.

The element of portfolio construction was much stronger than a decade ago, he said. It was no longer a question of chasing individual managers.

UBS manages $44bn in hedge fund assets, where it reckons it is the biggest hedge of hedge funds providers, with $36bn of assets in these vehicles.