All clear folks: It’s safe to go back in now

Most are aware by now that the money that flew out of the hedge fund industry faster than the patrons who ran for the exits after Abraham Lincoln was shot in the Ford Theatre are slowly starting to venture back into the space.

Still shell-shocked and weary and certainly more cautious than before the “incident,” investors, in particular pension funds and other large institutions, are plunking money back down on the table.

Indeed, according to Credit Suisse Group AG’s latest survey of institutional investors, hedge fund assets could return to pre-financial-crisis levels by the end of this year. The survey of 600 institutional investors around the world that hold more than $1 trillion in assets suggests that global assets could grow by as much as 25% from $1.6 trillion at the end of 2009, which would put the total close to the pre-recession level of nearly $2 trillion.

The trend backs up recent reports that we at have read and reported on, including this study released earlier this month by PerTrac.

Of course, the days of Chief Investment Officers practically begging for hedge fund managers to accept their checks are long gone. The new mantra, as any hedge fund manager will tell you, is due diligence, due diligence and more due diligence, with a lot more dating and dancing before the final documents are signed and the money goes into the bank.

Another Credit Suisse survey of hedge fund managers released in February (click here for the summary press release) found the due diligence process has lengthened by 30% since September 2008.

And the trend continues: Some 65% of investors surveyed said they are spending more time on due diligence investigations of managers they may invest in – on average, close to six months (See chart below of investors’ top concerns regarding funded status, risk management and volatility, by region.)

Source: Credit Suisse AG

On the flip side, managers are trying to lure back investors with promises to increase disclosure and cut fees in exchange for longer lockups, the survey said. A full 94% percent of investors surveyed said they are receiving more information from managers.

So what’s the impetus among investors for putting more money to work in hedge funds? According to those surveyed, there are a number of reasons, namely reduce portfolio volatility, diversify away from equities and, of course, enhance returns (see chart from survey report below).

Source: Credit Suisse AG

Of particular note was the hedge fund vehicle of choice for most institutions: funds of hedge funds, good news for a segment of the alternatives industry that many had sounded the death knell for post 2008. Indeed, plan sponsors in all regions preferred fund-of-hedge-fund structures followed by single manager hedge fund strategies.

While the asset flows are going in the right direction, they are also going in different directions. According to the survey, the Asia-Pacific region will likely be the biggest beneficiary among all geographies, with 61% of investors indicating they are increasing or considering raising their allocations to managers focused on the region.

So what to make of the results? If true to their word, institutions will continue putting money to work in hedge fund strategies, with an eye to taking the fund-of-hedge-fund approach with lower fees, greater transparency and a lot more wheeling, dealing and courting than before. At least they’re coming back in to the theater.

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