KUALA LUMPUR (Jan 27): A new global survey among hedge fund professionals reveals strong optimism within the industry, with expectations pension funds will increase their exposure to hedge funds.

The findings were made by US-based State Street Corporation's survey of 235 hedge fund professionals.

In a statement today, State Street said the survey showed 55% of respondents expected pension funds to increase their exposure to hedge fund strategies over the next five years.

This proportion increased to 63% when the question was asked more broadly about institutional investors exposure to hedge funds over the time frame.

State Street said that of the 55% of hedge fund professionals who expected pension funds to increase their allocations, 53% believed the main driver for this would be the performance challenges facing investors’ portfolios.

It said 35% believed there would be a growing focus on portfolio diversification while 13% said it would be due to improved terms offered by hedge funds.

However, it said that to really capitalise on the growing appetite for hedge fund strategies, nine out of ten industry professionals interviewed believed hedge funds would need to demonstrate more clearly their value to prospective investors.

State Street global head for alternative investment solutions sales Maria Cantillon said despite the challenges facing the hedge fund industry, the findings showed that many working in the sector were
optimistic about its future prospects.

“This is being fuelled by challenges facing asset owners as they search for better returns and greater diversification. The hedge fund industry is maturing and becoming more transparent and competitive.

“In terms of how hedge fund professionals see their own firms changing over the next five years, 60% expect to broaden the range of investment strategies they manage; 37% anticipate that they will expand abroad and one in ten expects to acquire another company,” said Cantillon.

State Street said that according to the survey, regulation would continue to have a significant impact on hedge fund managers.

“However, the full impact of Basel III is yet to be determined, with 29% of respondents believing that it will significantly increase their firm’s cost of financing, compared to 42% saying it wouldn’t and the remainder (29%) saying they don’t know.

“The findings also suggest growing competition from alternative mutual funds. Half of those interviewed believe that over the next five years, they will seize market share from traditional hedge fund strategies,” it said.