While hedge funds are gaining profile in investment portfolios, investors have concerns about security and liquidity, according to a recent survey by Barron’s magazine and Morningstar research firm.
The “2009 Alternative Investment Survey of Institutions and Financial Advisors” was released earlier this month. The online survey polled 89 institutions and 300 financial advisors from late September to early October of this year.
The financial crisis has not been kind to hedge funds. From 2007 to 2008, the industry contracted from $2 trillion to approximately $1.7 trillion as investors lost trust in hedge funds, pulling their money out as managers continued to bleed money throughout the economic turbulence.
This uncertainty was reflected in the Barron’s and Morningstar survey, in which 61 percent of financial advisers pointed to investor concerns about recouping funds and potential illiquidity as major reasons to hesitate in investing in hedge funds.
That percentage was up from 52 percent in last year’s survey.
Transparency was also a major issue cited in the survey. Sixty-three percent of respondents noted that a lack of knowledge about how hedge fund managers actually make their money was a reason to hesitate before investing in this market. This was a marked increase from 45 percent the year before.
However, many of the survey’s respondents seemed to believe hedge funds are being a more viable alternative investment tool as time goes on. Fifteen percent of financial advisors said that hedge funds were, among alternative investments, the most significant driver of growth. Hedge funds were also seen as having the most growth potential over the next five years; sixteen percent of advisors placed hedge funds above a slate of other alternative investments as opposed to 11 percent in 2008.
“Institutions and advisors are viewing the alternative investment realm in remarkably similar manners,” the survey reads.
It concludes that for both institutions and advisors seeking to invest in alternatives, the main objective is to find what it called “the best of both worlds” – that is, investments that offer aggressive returns and portfolio diversification combined with liquidity and transparency.