Institutional investors have made a tentative shift back towards funds of hedge funds according to Investor Source's most recent Institutional Barometer.

The barometer, a survey of 128 institutions across Europe, published in association with Clifford Chance, provides insight into the sources of institutional funding for hedge fund managers. The Q4 2005 report looks at the trends, methods and allocations at work in the institutional marketplace and shows that the previous quarter's movement away from funds-of-hedge-funds has come to an end, with a tentative shift back to the asset class.

'We have seen a number of exciting developments in the institutional marketplace over the past three months,' says Matthew Craig-Greene, Research Director at Investor Source. 'Following a shift towards single manager hedge funds in Q3 2005, some institutions are now returning to fund-of-hedge-funds, perhaps admitting defeat in the difficult task of identifying quality single manager funds in an increasingly overcrowded market place.'

Despite the move towards the fund-of-hedge-funds investment model, data from previous Barometers shows that single manager hedge funds are nevertheless playing a more prominent role in the portfolios of institutional investors than at the beginning of 2005.

Indeed, Craig-Greene was keen to stress that any move away from single manager funds may only be temporary: 'We cannot be sure whether the move back towards more conservative investments is a permanent one; if single manager funds continue to post the attractive returns they have been achieving so far this year, it may only be a matter of time before institutions begin once again to side-step funds-of-hedge-funds and chase the higher returns achievable through direct fund investment.'

This quarter's Barometer also includes an article by Matthew Judd, Partner at Clifford Chance reviewing recent regulatory changes in the Spanish hedge fund market. Although Judd was enthusiastic at the increased institutional interest in the country, as well as a thriving domestic hedge fund market, he nevertheless remains wary that, '…the Spanish market may still fall short of creating an attractive playing field for foreign hedge funds, and the regulatory body is unlikely to remove the tax discrimination that has hampered investment in the asset class for so long.'

The next Institutional Barometer is currently being researched for release in May.


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