Institutional investors remain committed to hedge funds despite the bashing the asset class has received in recent months. In fact, a large number even plan to increase their allocations in 2009. This is according to a recent hedge fund study carried out by State Street in conjunction with the 2008 Global Absolute Return Congress (Global ARC).

State Street's fifth institutional investor hedge fund study canvassed the opinions of global public and government pensions (37%), corporate pensions (19%), endowments and foundations (29%) and insurance companies (5%) with an estimated $1 trillion in total investable assets.

While the study does show a moderate decline in overall allocations to hedge funds (decreasing from 68% in 2007 to 51% in 2008), the majority claimed they intended to either increase (49%) or maintain (39%) their allocation to hedge funds in the next year. The results, says Gary Enos, executive vice president at State Street, can be attributed to investors' continued desire to diversify their portfolios.

"Hedge funds have not been immune to the extremely volatile market environment, and while alternative investments, including hedge funds, largely outperformed traditional investments in 2008, negative returns understandably disappointed. Although hedge fund allocations declined slightly over the past year, we anticipate growth will resume later in 2009, as institutional investors continue to focus on diversification and risk management."

In spite of this enthusiasm, investors are still acutely aware of the challenges surrounding hedge fund investing, with 77% reporting that accurately valuing hedge fund holdings can be problematic. Sixty-four per cent address this issue with the use of an independent fund administrator. Increased transparency and more sophisticated risk management procedures are also key themes for the future of hedge fund investing.

"The recent unprecedented market volatility has prompted institutions to increase their focus on risk management," said Enos. "To address these concerns and the increasingly difficult challenges inherent in the financial markets, the hedge fund community and allied third-party providers and administrators are stepping up efforts to develop and expand risk management solutions for institutional investors."

The survey also indicated that interest in private equity remained strong, with half of those surveyed also intending to increase their allocations to the asset class in the next 12 months.

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