Divyesh Hindocha, Global Head of Investment Consulting Policy at Mercer, commented:
"The lack of satisfaction expressed by investors is likely to be due to a mixture of high expectations and fund managers not explaining their strategies clearly enough. He added: "While funds of hedge funds are attracting a great deal of attention, many investors are unclear about what they wish to achieve by investing in them, and what the funds can realistically deliver. If investors' objectives are unclear and their expectations are out of kilter with reality, there is scope for disappointment."
The survey also found that just 58% of respondents understand their funds of hedge fund manager's investment approach, although this varied from around a third in Europe and Japan to as much as 85% in Australia and New Zealand, where these funds have been available for longer.
Mr Hindocha commented: "The survey shows that funds of hedge fund managers can do far more to improve their client servicing skills. Investors want to look under the bonnet to gain a better understanding of a fund's strategy and operations, but many investment managers are reluctant to disclose full details.
"Fund managers that are transparent about their strategies and processes are more likely to attract investors and be able to manage their clients' expectations better."
Allocations to funds of hedge funds
Globally, a third of the pension funds surveyed (33%) invest in funds of hedge funds. Even though many of their expectations are not currently being met, the survey found that 54% intend to increase their allocations to hedge funds within the next two years. The greatest increase is likely to be in the US and Canada, at 62%, compared to 45% in Europe and 42% in Australia and New Zealand.
Of the pension schemes that do not currently invest in funds of hedge funds, 19% say they are likely to within the next two years.
"Pension schemes look to funds of hedge funds to diversify their investment risk and sources of return. Allocations tend to be relatively small, but the more comfortable schemes become with the asset class, the more likely they are to increase their investments," said Mr Hindocha.
He added: "Pension schemes that have been investing in funds of hedge funds for a while are starting to look at single manager hedge funds, which allow them to tailor their strategies and potentially reduce costs. But investors should be aware that greater resources are needed to research individual managers and conduct thorough due diligence."
According to the survey, 20% of respondents are likely to use single manager/multiple investment strategy hedge funds in the next two years while 13% expect to use single manager/single strategy funds.
Fees
Over a third of survey respondents (35%) are dissatisfied with funds of hedge fund manager fees. On top of the underlying hedge fund managers' fees, funds of fund managers typically charge around a 1% management fee plus a 5% to 10% performance fee.
Mr Hindocha commented: "In an environment of low investment returns, investors are much more sensitive about fees. Hedge fund managers are beginning to see the value of having institutional investors as clients and, as a result, we are starting to see some flexibility in funds of hedge fund managers' fees, as well as increased transparency of charges."
Of those that do not currently invest in funds of hedge funds, the greatest barrier was fees, cited by 60% of respondents.
