As more money is expected to flow into hedge funds, institutional investors will focus on implementing stronger due diligence capabilities while hedge funds should beware of an inflationary environment in 2007, said leading financial experts today at a hedge fund industry panel hosted by Dow Jones Indexes.
As more institutional investors turn toward alternative investment vehicles like hedge funds, they will demand more transparency and risk management tools in making their asset-allocation decisions, said John Prestbo, editor and executive director of Dow Jones Indexes, adding that style-pure hedge fund indexes may provide one such solution.
“Institutional investors, like pension funds and endowments, have become increasingly educated on what’s available to them. The need for risk-control and due diligence measures remains the same — if not greater,” Mr. Prestbo said. “The trend we’re seeing now is that as institutions become more sophisticated in the hedge fund space, they will develop more highly specialized and targeted objectives. For that reason we believe style-pure hedge fund indexes, like the Dow Jones Hedge Fund Strategy Benchmarks, will grow increasingly useful in the months and years ahead.”
“Most institutional investors are trying very hard to get their arms around proper due diligence and find it very difficult to find consultants who can provide them with objective information. Therefore, they have been looking internally to develop processes that address these needs; this is problematic as most trustees do not have the experience to pick appropriate managers,” agreed Daniel Strachman, managing partner of A&C Advisors LLC, a strategic consulting firm. “Institutional investors need to focus on due diligence, which is going to be the topic du jour in the months ahead, especially in light of recent losses sustained by some funds.”
Michael Litt, partner and multi-strategy portfolio manager & strategist at FrontPoint Pointers, a Connecticut-based multi-strategy hedge fund, cautioned hedge fund managers and investors alike that the Federal Reserve’s next steps in cutting or maintaining interest rates, the continued importance of China’s economy in the global markets and geopolitical factors could result in an inflationary environment in the year ahead.
“These events will bear the most impact on long bond and real return bond strategies,” Mr. Litt said. “But the return of volatility to the financial markets will come as a surprise to many.”
