Institutional investors are expected to continue increasing their allocations to hedge funds, though at a slower rate than recent years, according to a Russell Investments survey. The survey found that hedge fund allocations currently account for 4.2% of total institutional assets and are projected to rise to 5.7% over the next two years. Hedge fund allocations vary by region, with the highest being 6% of assets in Japan/Asia. Increased transparency and fee reductions are key factors that will drive future hedge fund growth.

1. institutional news
Hedge fund allocations on the up, says Russell allocations to hedge funds had increased to
Hedge fund allocations among global institu- management. Trends uncovered in the re-
tional investors are still expected to rise, al- sponses include a move to allocating scarce about the 7% to 8% range in North America
beit at a slower rate than in recent years, ac- internal resources to evaluate hedge funds, and Europe and as high as 9% to 10% in Ja-
cording to a survey compiled by Russell separate account investing and institutional pan/Asia. These increases were driven by
In vestments. pressure to drive down fees. both the capital invested and increased lever-
Overall, allocations to hedge funds , now Russell detected some desire to increase re- age, which contributed to higher values in a
4.2% of total assets, will rise to 5. 7% in the liance on customised account structures ac- rising market.
next two years as most institutions boost cessing hedge fund managers, with expected The most hedge fund disenchantment was
their allocations to alternatives in general usage increasing from 6% in 2009 to 15% by found in Europe, according to Russell, where
with areas such as infrastructure and private 2012. The benefits of managed accounts are allocations may not return to peak levels for
equity also gaining interest. By global re- particularly in the an~a of transparency, but some time. Hedge funds are expected to re-
gions, the strongest allocation to hedge funds insufficient assets in any one fund may not bound faster in North America and Japan/
on a percentage basis is in Japan/Asia , where be enough for some investors to wield "sepa- Asia . Key to that future growth is the concept
hedge funds are reported to account for 6% rate account clout" and some separate ac- of fee 'breakpoints' arising in hedge funds,
of total assets as of 2009. count structures may add unacceptable fidu- similar to the tradition of mutual funds. Re-
Russell completed its survey during the ciary or operational risks for the plan spondents to the Russell survey anticipate
first month of 2010 with 119 firms respond- sponsor. achieving such a breakpoint in hedge funds
ing, representing $1.3 trillion of assets under Previous surveys showed that the average over the next year or two.
July/August 2010