Hedge Funds Luring Institutional Money

More institutional investors are ready to try putting money in hedge funds but they want no surprises -- and the right to get out fast if something goes wrong, a survey released Tuesday showed.

Hedge funds, lightly regulated investment pools once primarily used by wealthy individuals, are luring institutions such as public pension funds and endowments. The attraction is the potential for above-average returns in the often fast-changing portfolios, which can invest in stocks, bonds, currencies, commodities and other instruments.

But the notorious secrecy of hedge fund managers, along with occasional blow-ups like the collapse of Long Term Capital Management in 1998, is making the new breed of investors more skittish, according to Deutsche Bank’s third annual Alternative Investment Survey.

Many investors no longer are willing to play by the old hedge-fund rules requiring a client to put up at least $1 million and keep it locked up for at least a year.

According to the Deutsche Bank survey, which polled 323 banks, endowments, consultants and others in the fourth quarter of 2003, 71% were willing to pay for the right to make early redemptions from hedge funds.

Many also want to see how a new manager performs for a little bit before committing cash; only 21% of respondents said they had allocated money to newly founded hedge funds, Deutsche Bank said.

To guard against nasty surprises, many investors in the survey said they were demanding more transparency from hedge fund managers. More than half of all investors said they reevaluated their portfolios monthly.

Some investors even are calling on private investigators to review hedge fund managers’ resumes and work histories for red flags before entrusting them with their money.

The survey indicated that the so-called long/short equity style of hedge fund investing, where managers can bet on both rising and falling stocks, would attract the largest amount of money this year.

The survey also found that for the second year in a row, investors will favor European and Asian hedge funds while paring back their exposure to hedge funds based in the U.S.

The hedge fund industry has seen its assets balloon to about $600 billion from about $50 billion in 1990.