TORONTO, March 18 /CNW/ - Transparency and risk management are considered
by investors to be just as important as performance when deciding whether to
retain their managers of alternative investments, according to a major new
report on the industry by PricewaterhouseCoopers (PwC).
A global survey of 226 institutional investors and alternative investment
providers, conducted by the Economist Intelligence Unit on behalf of PwC,
found that flattening returns have contributed to investor pressure for more
and better governance. The quality of compliance and risk management process
(41% of investors) and transparency (41% of investors) were rated higher than
performance (40% of investors) among the criteria for deselecting investment
"Our findings back up the belief that when returns start to moderate,
investors focus more intently on operational infrastructure" says Raj Kothari,
PwC 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."
Despite this, investors have been slow to adapt risk assessment
processes. More than half (53%) say that they have made no change to their
risk management policies despite an increased allocation to alternatives.
The study, which covers hedge funds, private equity, real estate and
infrastructure funds, also reveals a gap in perceptions between investors and
providers. Investment firms largely believe they are good at managing risk.
They rate themselves 'effective' in the accounting and reporting of
transactions (67%) and policies to protect against fraud (65%). Investors
largely disagree. For instance, just 18% of hedge fund investors think
valuation policies are effective and only 16% think IT security is good.
Although many alternative investment providers are suffering from the
effects of the global credit crunch, the report predicts the industry will
enjoy rapid growth over the next three years. Among investors, 41% expect to
increase their allocation to real estate, 40% to private equity, 35% to
commodities and 33% to hedge funds. Very few plan a smaller allocation to any
of these sectors.
Other key findings include:
- Hedge funds have come under particular pressure as returns have
fallen. Less than half of respondents are satisfied with the
performance of hedge funds (46%). Private equity and real estate fare
better at 67% and 57% respectively.
- North American alternative investment firms are rated higher by
investors for the quality of their governance, risk management
reporting and levels of transparency. Asian firms are generally
adequate in their breadth of reporting. European firms are found
wanting in some areas.
- Many investors would like to see more guidelines and regulation.
Nearly half of all hedge fund industry participants would support
guidelines on reporting to investors and 41% would support formal
disclosure to regulatory bodies.
- There is also a push for greater oversight of the private equity
industry. This is particularly evident in Asia, where 55% of
investors would like to see guidelines on reporting and 48% want
formal disclosures to regulatory bodies. This clear desire for a
strong framework is suggestive of an emerging regional industry
seeking a fast-track route to global recognition.
- The more mature economies are least in favour of regulatory moves,
with 43% of US private equity participants supporting guidelines on
reporting and just 35% in Europe.
PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance,
tax and advisory services to build public trust and enhance value for its
clients and their stakeholders. More than 146,000 people in 150 countries
across our network share their thinking, experience and solutions to develop
fresh perspectives and practical advice. In Canada, PricewaterhouseCoopers LLP
(www.pwc.com/ca) and its related entities have more than 5,200 partners and
staff in offices across the country.
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For further information:
For further information: Carolyn Forest, PricewaterhouseCoopers, +44 (0)
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