Hedge funds are likely to become an increasingly popular investment for institutional investors tryi...
Hedge funds are likely to become an increasingly popular investment for institutional investors trying to secure returns and reduce pension deficits, Grant Thornton's Financial Markets Group says.
According to research by JP Morgan Fleming Asset Management out last week, as many as one in four European institutions have recently allocated money to hedge funds, and just over one in three are thinking about making similar investments.
Although this is a "positive sign", Grant Thornton senior manager John Wilson warns that hedge funds "will not achieve their full potential unless the investment management industry is prepared to make hedge funds more user friendly".
At the moment, these funds are promoted as displaying several advantages, Wilson says. Many also seem to offering great returns at low risk at a time when institutions are turning away from long-only equities and fixed income funds.
But this could prove fatal for hedge funds as many investors will be wary that what they are being offered is "too good to be true", Wilson says.
"The investment management industry has to face the challenge of presenting hedge funds in laymen's terms, with presentation of the downside risks being given equal weight to the advantages".
Currently, there are a number of different hedge funds available with both unusual and complex strategies, which in turn has created funds with a wide range of potential risks and returns.
This makes it difficult for investors to obtain knowledgeable and unbiased advice in a non-complex lingo, Wilson says.
He adds: "Only through sound independent advice will pension fund Trustees have the confidence to diversify their investments and to achieve better returns for their members.
"However, they should do so with a clear understanding of the balance of risk and reward associated with each fund strategy, so that they can compare the pros and cons of alternative investment choices and consider how appropriate each fund is to the scheme's liabilities and investment principles."
While hedge funds may be seen as an attractive investment compared to other asset classes, they still have continue to outperform equities in order to remain competitive.
"Only time will tell if they succeed in doing so", Wilson adds.
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