Fed Survey: Hedge Funds Ward Off Risk

(October 12, 2011) — Hedge funds are lowering their risk tolerance, a new survey by the Federal Reserve reveals.

The study released Tuesday showed that more than 50% of respondents reported that risk exposure with hedge funds has lowered over the previous quarter.

Furthermore, 20% of dealers, with regards to most-favored hedge fund clients, and one-third of dealers, with regard to other hedge fund clients, revealed a decrease in their exposure to risk since the beginning of 2011. Of the dealers surveyed, about 86% said pricing terms remained unchanged.

In addition, the Fed’s survey showed that the number of banks easing other terms to hedge funds, such as haircuts, still outnumbered those tightening. For such terms, 9.5% of dealers tightened while 33.3% eased and 57.1% were unchanged.

“Responses to the September survey pointed to small changes in credit terms across major classes of counterparties with no clear overall bias toward either easing or tightening over the past three months, in contrast with the broad-based easing that had been since…June 2010,” said the Fed survey, which was conducted last month while asking about changes between June and August, when concern about Europe’s debt crisis was at its peak.

The survey by the Fed comes as the $46 billion Massachusetts Pension Reserves Investment Management (MassPRIM) made a decision to invest $280 million with 11 hedge fund managers as part of its move into direct investments.

According to a report from MassPRIM’s board meeting held yesterday, Massachusetts sent $25 million to each of the following fund firms (Viking Global Investors will receive $30 million):

1) Anchorage Capital Group

2) Arrowgrass Capital Partners

3) BlueCrest Capital Management

4) Brevan Howard Capital Management

5) Claren Road Asset Management

6) Elliott Management

7) Kingdon Capital Management

8) Och-Ziff Capital Management Group

9) Taconic Capital Advisors

10) York Capital Management

11) Viking Global Investors

In February, MassPRIM spokesman Barry Nolan told aiCIO that the fund decided to shift from a fully fund-of-funds investment strategy to incorporating more direct hedge funds. According to Nolan, MassPRIM’s decision signaled an effort by the fund to eliminate millions of dollars in fees as well as the threat of over-diversification that often comes from relying solely on a fund-of-funds approach. MassPRIM felt the decision to increase the percentage of direct investments into hedge funds translates to an attempt to make more intelligent decisions on asset allocation and rebalancing.