Investors seek strategy, track record & fund performance in hedge funds

by Amy Bensted

  • 20 Sep 2010
  • HF

At the beginning of this month, Preqin released the results of its latest survey of institutional investors. As part of this survey, investors were asked to rank 10 parameters associated with hedge funds in order of importance to their fund selection process. Parameters which scored the highest are considered the most important to institutional investors when considering a new fund opportunity. Investors consider the fund strategy as the highest priority when looking at potential fund opportunities. Fund track record and firm reputation is the second most valued feature of a fund. Investors have always valued the track record of a hedge fund as a way of evaluating past performance and potential for future returns. Over the past three years’ surveys, track record has always been in the top three highest ranked attributes of a potential fund opportunity. Last year transparency was the second most sought after feature of a hedge fund; however transparency has now fallen to sixth on the list. Other areas of the report show that investors are rejecting fund opportunities as a result of lack of transparency, so this is clearly still a very important factor for investors when looking at new funds. However, as investors are now finding that an increasing number of funds are becoming more transparent about the sources of their returns, they have enough choice of transparent vehicles to no longer view this as such an important factor as previously.

Risk management procedures are another vital aspect of a fund which investors will look to see in place before investment. Following high-profile fund meltdowns and frauds, investors have become much more cautious when it comes to manager selection, and look for strong risk procedures to be implemented as well as the use of third-party groups to audit returns and assets. Liquidity of funds remains an important criterion for hedge fund investors when looking at new fund opportunities. Investors recognise that liquidity may have to be compromised for certain strategies; however they are no longer willing to invest in funds with unwarranted lock-ups or gate provisions.

The full report is available here,_Sept_2010.pdf

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