| Nearly Half Plan to Increase Hedge Fund Allocations in 2009
Increased Focus on Accurate Valuations and Transparency Remains Paramount
Boston, March 26, 2009 – State Street Corporation (NYSE: STT), the world’s leading provider of financial services to institutional investors, released today its fifth institutional investor hedge fund study. State Street conducted the study late last year in conjunction with the 2008 Global Absolute Return Congress (Global ARC). Asset owners participating in the study included representatives from global public and government pensions (37 percent), corporate pensions (19 percent), endowments and foundations (29 percent), and insurance companies (5 percent) with an estimated $1 trillion in total investable assets.
The results of State Street’s study indicate that turbulent financial markets have not caused major shifts in institutional asset allocations. Three quarters of institutional investors said they do not plan to modify portfolio allocations. Further, while the study results indicate a moderate decline in overall allocations to hedge funds, the majority of institutions report an intention to increase or maintain current hedge fund allocations over the next 12 months.
“Hedge funds have not been immune to the extremely volatile market environment,” said Gary Enos, executive vice president and head of relationship management and client strategy for State Street’s Alternative Investment Solutions team. “While alternative investments, including hedge funds, largely outperformed traditional investments in 2008, negative returns understandably disappointed. Although hedge fund allocations declined slightly over the past year, we anticipate growth will resume later in 2009, as institutional investors continue to focus on diversification and risk management.”
The results of State Street’s 2009 hedge fund study show a moderate decline in overall allocations to hedge funds, with institutions allocating more than five percent of their portfolio to hedge funds decreasing from two-thirds (68 percent) in 2007 to one half (51 percent) in 2008. Nevertheless, most institutions intend to either increase (49 percent) or maintain (39 percent) their allocation to hedge funds in the next year. The majority of funding for new hedge fund positions is expected to come from equity allocations (80 percent), as compared to 2007 when two in five institutions (39 percent) planned to draw from bond allocations to fund new hedge fund positions.
Another encouraging sign for alternatives is increased institutional interest in private equity funds. Over half of institutions (53 percent) have allocated more than five percent of their portfolio to private equity funds, and half intend to increase their allocation to private equity over the next 12 months.
Increased Focus on Accurate Valuations, Greater Transparency
Among the challenges arising from the recent market volatility has been the growing difficulty in accurately valuing derivatives and other complex financial instruments. As a result, more institutions reported that accurately valuing hedge fund holdings can be problematic (77 percent versus 55 percent in 2007). Two-thirds of institutional investors (64 percent) attribute the accurate valuation of their hedge fund holdings to the use of an independent fund administrator, illustrating the valuable role that third-party providers can play.
Institutional investors also continue to emphasize transparency. Five out of six institutions (84 percent) expect more disclosure of hedge fund positions and nearly half (49 percent) anticipate more frequent reporting from hedge fund managers. Meanwhile, only a few (19 percent) currently receive some level of consistent transparency across hedge fund holdings.
By all accounts, institutional risk management programs are growing more sophisticated. While one-third of institutions place a greater emphasis on qualitative analysis when monitoring the ongoing performance of alternative investments, half place an emphasis on both qualitative and quantitative analysis. Further, nearly two-thirds (61 percent) of institutional investors either intend to (17 percent) or already are (44 percent) aggregating alternative investment risk exposures with other portfolio exposures to gain a meaningful assessment of risk across their portfolio.
“The recent unprecedented market volatility has prompted institutions to increase their focus on risk management,” said Enos. “To address these concerns and the increasingly difficult challenges inherent in the financial markets, the hedge fund community and allied third-party providers and administrators are stepping up efforts to develop and expand risk management solutions for institutional investors.”
Investment Loss and Return Correlations
Institutions say the risk of investment loss presents the greatest threat to hedge fund investing today (26 percent). This risk resulted primarily because, while hedge fund indices outperformed equity benchmarks (such as the S&P 500 Index) by more than 20 percent in 2008, declines in hedge fund returns still disappointed. While slightly less frequent, questions about hedge fund differentiation also remain, as hedge fund managers work to innovate and traditional investment managers continue to roll out hedge-like strategies. This year, 19 percent of investors expressed concerns about the correlation of hedge fund returns with those of traditional investments, as compared to 23 percent a year ago.
For a copy of the State Street hedge fund research study, please contact firstname.lastname@example.org.
State Street Corporation (NYSE: STT) is the world's leading provider of financial services to institutional investors, including investment servicing, investment management and investment research and trading. With $12 trillion in assets under custody and $1.4 trillion in assets under management at December 31, 2008, State Street operates in 27 countries and more than 100 geographic markets worldwide. For more information, visit State Street’s website at www.statestreet.com.
This news release may contain forward-looking statements, as defined by federal securities laws, including statements about the financial outlook and business environment. Any such statements are based on current expectations and involve a number of risks and uncertainties. Important factors, including those mentioned in this news release, that could cause actual results to differ materially are set forth in the company’s 2008 annual report and subsequent SEC filings. They include risks and uncertainties relating to the pace at which State Street adds new clients or at which existing clients use additional services, the value of global and regional financial markets, and the dynamics of the markets State Street serves. State Street encourages investors to review its annual report and SEC filings in conjunction with this announcement and prior to making any investment decision. The forward-looking statements contained in this news release speak only as of the date of release, March 26, 2009, and the company does not undertake to revise those forward-looking statements to reflect events after the date of this release.