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Institutional investment: Direct investing increases

Boards spend more time discussing alternative investments.

Direct hedge fund investing by institutional investors continues to grow, according to a survey conducted by State Street Corporation. More than half of the institutions surveyed, whose combined assets totalled more than $1 trillion, invested with more than 10 hedge funds, compared with 48% the previous year. Forty-four percent of respondents to the 2007 survey invested directly in more than 20 managers.

Greater dedication to investing in hedge funds is also apparent from the survey. Sixty percent of institutional investors surveyed said that their governing boards spend more than 15% of their time discussing alternative investments. More than half of those spent 20% of their time doing so. Last year, only half those surveyed claimed to spend such a large amount of time talking about investing in alternative asset classes.

Funds of funds out of favour

Given that large institutional investors are now more comfortable about investing directly, and would appear to be sufficiently knowledgeable to put together a diversified portfolio of managers, the role of funds of hedge funds is once more brought into question. Thirty-two percent of institutions did not use a fund of hedge funds manager, up 4% from one year ago. Furthermore, the number of funds of hedge funds used by institutional investors appears to be dropping. Only 8% of those surveyed invest with more than five funds of hedge funds, down from 15% last year. The majority of respondents invest with between one and three funds of hedge funds. Although funds of hedge funds appear to be losing popularity with the larger institutional investors, their survival is likely to be assured by the growing number of investors new to alternatives. These institutional investors still prefer to invest with funds of hedge funds rather than investing directly, until their comfort levels increase.

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