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Greater hedge fund exposure forecast

By Dan McCrum

Published: December 14 2010 17:37 | Last updated: December 14 2010 17:37

Institutional investors’ hunt for higher returns will lead them to increase
their exposure to hedge funds, commodities and private equity, according to
a survey.

The research, conducted by *Bank of
America<http://markets.ft.com/tearsheets/performance.asp?s=us:BAC>
* with Quinnipiac university and the Connecticut Hedge Fund Association,
found almost two-thirds of investors intended to increase allocations to
alternative assets in the next 12 to 24 months.

Fewer than a quarter of the 107 US and international investors polled,
representing about $2,100bn in assets under management, said they
would increase
portfolio allocations to fixed
income<http://www.ft.com/cms/s/0/9c878dd4-ff0c-11df-956b-00144feab49a.html#axzz186li3PWT>or
equities.

A majority are now neutral on stock market investments, and only one in 20
said they were bullish on fixed income.

While many pension plans may lower assumptions for future investment
returns, more than half of the plans surveyed still assume an annual rate of
return between 7.5 per cent and 8.5 per cent, a high hurdle given low
interest rates.

“Who wants to lend money to the US government for 10 years at 2.5 per cent?”
said one endowment investor.

“As interest rates grind to zero, the opportunity for the hedge fund
industry is there to capture,” said Stephen Keller, head of Americas
financing sales for Bank of America.

“Inflows to funds in the third quarter picked up significantly in advance of
the Federal Reserve’s programme of quantitative
easing<http://www.ft.com/indepth/federal-reserve-quantitative-easing>
.

“Many investors are coming to the conclusion that one way to hit targets for
returns is through alternative strategies.”

Attitudes have changed since the survey was conducted for the first time
last year.

Choosing from a broader range of asset classes, emerging market equities was
the most popular choice in 2009 with 42 per cent of investors intending to
increase allocations, followed by private equity and investment grade bonds.


The shift in preferences will be a relief to a hedge fund industry
<http://www.ft.com/cms/s/0/1ab1c4b0-7329-11df-ae73-00144feabdc0.html#axzz17fRY0rS4>suffering
a mixed year for performance.

After the industry lost money in the first half of the year, returns have
improved. The average hedge fund was up 7.1 per cent for the year to
November, according to Hedge Fund Research, while the S&P 500 rose 5.8 per
cent.

However, fund-of-hedge-funds still appear to be struggling with the
reluctance of investors to pay an extra layer of fees.

Just 5 per cent of those polled indicated an intention to increase exposure
via such indirect investment.

Not one of the public pension plans surveyed intended to increase
allocations to fund-of-hedge-funds.


*Joan K. Peugh***

*Rosemont Seneca Partners*

1010 Wisconsin Avenue, NW

Suite 705

Washington, DC 20007

T:(202) 333-1880

F: (202 333-1886

M: (202) 841-8543

jpeugh@rosemontseneca.co