SEI Study: Hedge Fund Managers Must Focus on Risk Management to Capitalize on Renewed Investor Commitment
Risk Management Infrastructure and Risk Reporting Take on New Prominence for Institutional Investors
OAKS, Pa., Jan. 18, 2011 /PRNewswire/ -- Institutional investors are bolstering their commitment to hedge funds, but expect greater transparency and solid risk management infrastructures from managers, according to an annual global study released today by SEI (Nasdaq: SEIC) in collaboration with Greenwich Associates. The report, entitled "Institutional Hedge Fund Investing Comes of Age: A New Perspective on the Road Ahead" and available at www.seic.com/2011HedgeResearch, indicates a need for hedge fund managers to enhance their risk management infrastructure and risk reporting, and institutionalize transparency policies to attract new capital, satisfy anxious investors, and protect their reputations. The study also revealed the importance of fund managers clearly articulating how their investment strategies add value to investors' portfolios, which presents an opportunity for managers to differentiate themselves through market-leading client service, reporting, and education.
The study results found that institutional investors' confidence in hedge funds is growing, as more than half (54 percent) of all survey respondents said they plan to increase target allocations over the next 12 months. That confidence is conditional, however, as the demand for increased transparency and risk management were recurring themes throughout this year's study. In fact, the focus on risk management infrastructure emerged as the second most important hedge fund selection criteria this year, with 75 percent of respondents deeming it "very important." Notably, it was not among the top ten selection factors in SEI's report last year. Only clarity of investment philosophy ranked higher than risk management, with 79 percent deeming it "very important" -- emphasizing the growing demand among investors for transparency and understandable investment strategies.
"The study confirms what we have been seeing and hearing from our clients -- that investors are committed to hedge funds, but managers must get and keep investors comfortable with their investment decision," said Phil Masterson, Managing Director for SEI's Investment Manager Services division. "Managers must differentiate themselves through increased transparency, enhanced risk management, and reporting as well as better overall client service to gain and retain assets post-financial crisis and post-Madoff. We've been making investments in new technologies and enhancing our services to help our clients do just that over the past 18 months and we'll continue to help them stay ahead of the curve."
Transparency is still a concern, as more than two-thirds (70 percent) of those polled pointed to a lack of transparency as their biggest worry, up from 56 percent in 2009. As for the types of information sought, more than three out of four respondents want risk analytics from managers -- a category of information that didn't even appear in the top 10 last year. Liquidity remains top-of-mind as well, as more than half (58 percent) of investors named liquidity risk their biggest worry in hedge fund investing, with more than 40 percent saying they have taken steps to enhance the liquidity of their hedge fund investments.
The report also noted that investors are not relying on regulation to improve hedge fund disclosure, liquidity, or risk management. Nearly one-third (30 percent) of respondents cite "limited regulation" as a primary concern of hedge fund investing. As investors are proactively seeking to have their concerns addressed, managers are responding.
"The hedge fund managers best equipped to compete prospectively will be those able to clearly articulate their value proposition and source of alpha, as well as demonstrate institutional-quality operations and risk management infrastructure," says Masterson.
The white paper is published by the SEI Knowledge Partnership, which provides ongoing business intelligence and guidance to SEI's investment manager clients.
About SEI's Investment Manager Services Division
SEI's Investment Manager Services division provides comprehensive operational outsourcing solutions to global investment managers focused on mutual funds, hedge and private equity funds, exchange traded funds, collective trusts, and separately managed, as well as institutional and private client, accounts. The division applies operating services, technologies, and business and regulatory knowledge to each client's business objectives. Its resources enable clients to meet the demands of the marketplace and sharpen business strategies by focusing on their core competencies. The division has been recognized by HFMWeek as "Most Innovative Fund Administrator (Over $30bn AUA)" and "Best Funds of Hedge Funds Administrator (Over $30bn AUA)." For more information, visit http://www.seic.com/enUS/im/303.htm.
SEI (Nasdaq: SEIC) is a leading global provider of outsourced asset management, investment processing and investment operations solutions. The company's innovative solutions help corporations, financial institutions, financial advisors, and affluent families create and manage wealth. As of September 30, 2010, through its subsidiaries and partnerships in which the company has a significant interest, SEI administers $402 billion in mutual fund and pooled assets and manages $164 billion in assets. SEI serves clients, conducts or is registered to conduct business and/or operations, from numerous offices worldwide. For more information, visit www.seic.com.
About Greenwich Associates
Greenwich Associates provides research-based strategy management services for financial professionals. Greenwich Associates' studies provide benefits to the buyers and sellers of financial services in the form of benchmark information on best practices and market intelligence on overall trends. Based in Stamford, Connecticut, with additional offices in London, Toronto, Tokyo, and Singapore, the firm offers over 100 research-based consulting programs to more than 250 global financial services companies. For more information on Greenwich Associates, please visit www.greenwich.com.
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