As many as 77 per cent of institutional investors surveyed have said that the financial turbulence of the past 12 months has not affected their confidence in hedge funds and that they will continue to invest or even increase their allocation.
In light of the fraudulent Madoff funds exposed in December, and with the global economic outlook becoming increasingly uncertain, industry research firm Preqin conducted interviews with more than 50 institutional hedge fund investors to gauge their sentiment and attitude.
Institutional investors have increasingly been a driving force behind the growth of the hedge fund industry over the past two decades, with investors looking to them as a means of diversification and for absolute returns.
However, the onset of the global financial crisis has resulted in hedge funds performing poorly in recent months.
The survey conducted late last month found that a quarter of investors polled stated that they would be increasing their allocations to hedge funds over the next 12 months and believed that there were some exciting investment opportunities opening up on the market.
"Our interviews with investors show that many remain committed to the asset class and are set to weather the storm and capitalise on a market upturn whenever this may occur," Preqin said.
At the other end of the spectrum, seven per cent of investors polled stated that they would be decreasing their allocations citing poor returns and a lack of transparency as the key factors in this decision.
The survey revealed that while investors on the whole remain committed to hedge funds, they are re-evaluating their investment criteria and objectives.
Although over 92 per cent of investors surveyed are continuing to invest in hedge funds, calls for increased transparency, lower fees and liquidity are key concerns.
The Madoff scandal does not appear to have drastically altered what investors look for in fund managers. A total of 15.4 per cent reported that they would be changing their strategies to only invest with well-known or established managers with a proven investment strategy.
Around 85 per cent will still use the same criteria to search for new managers, and as a result Preqin expects trends witnessed over the past two years, such as emerging managers being increasingly used within investor's portfolios, to continue.
Although l'affaire Madoff has not seriously affected the types of funds that are being considered, it is having some notable effects on institutional investors, of whom 38.5 per cent said they would be carry out more vigorous due diligence checks.
"While our findings revealed there is no planned mass exodus from hedge funds, with some investors even increasing their allocations, for the majority of institutional investors the events of the last 12 months have changed their demands from hedge funds," Preqin said.
Increased liquidity, lower fees, and transparency were common demands being made by investors. A key finding was the number of investors that said increased liquidity and the ability for quick withdrawal from funds, especially in bad times, is essential in the future.
Calls for hedge funds to be less opaque was a common request among investors surveyed, with 43 per cent raising this as a fundamental issue that needs to be improved. In the aftermath of the Madoff scandal investors want to know what managers are doing on a more frequent basis and to have a better understanding of how their returns are being generated.
In addition to the dissatisfaction shown over the level of information they receive about strategy, over a third were not completely satisfied with the quality of information on liquidity and fund reporting generally.
Since December, investors have become more stringent when it comes to the use of independent administrators and custodians, the survey revealed.
The absence of full-time independent administrators and custodians at some large US hedge funds has caused some big-name investors such as Union Bancaire Privee – who acknowledged a $700 million (Dh2.56trn) exposure to fraudulent Madoff funds – to publicly threaten to pull capital out of funds that do not employ independent administrators.
Several investors stated that while they will continue to invest in hedge funds they have refocused their investment strategy and will be looking to invest with managers that employ a clear and understandable strategy.
Investment strategies that investors expressed a keen interest in were global macro, credit and event driven strategies, while convertible arbitrage and emerging markets were less popular.
A large number of investors felt the downturn has reinforced their bargaining power when negotiating fees. Approximately 35 per cent of investors felt more confident to negotiate on fees.