Transparency, Risk Management Ranked as Highly as Returns

“Our findings back up the belief that when returns start to moderate, investors focus more intently on operational infrastructure,” says Raj Kothari, PricewaterhouseCoopers partner and leader of the Canadian investment management practice. “Indeed the survey shows that this is a key ingredient and not just an element in keeping alternatives in their portfolios in a subdued environment.”

However, the report also illustrates that investors have been slow to adapt risk management processes. Fifty-three percent of respondents admit to making no change to their risk management policies despite an increased allocation to alternative investments.

The study also reveals a gap in perceptions between investors and providers. Investment firms gave themselves a 67% effectiveness rating in the accounting and reporting of transactions, and 65% with regard to policies to protect against fraud. On the other hand, only 18% of hedge fund investors approve of the current valuation policies and 16% perceive IT security as good.

The report predicts rapid growth for the alternative investment industry in the next three years despite the current credit crisis. Forty-one percent of investors polled expect to increase their allocation in real estate, 40% to private equity, 35% to commodities, and 33% to hedge funds.

The poll found that attitudes on reporting and risk management varied by region, with North American alternative investment firms generally rating highly among investors, Asian firms rated as adequate and European firms less so. Nearly half of all hedge fund participants support guidelines on reporting to investors, and 55% of investors would like to see the same with regard to Asia in particular.

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