Institutional investors continue to embrace hedge funds, hunting for outsized returns.

According to a survey by Preqin, notes FINalternatives, 30 percent of responding institutional investors will definitely boost their allocations to hedge funds over the next three years, while 60 percent indicated they are considering doing so. This is in keeping with the recent move by institutions to jack up their allocations to alternative investments in general.

The bottom line is that institutions face some pretty cringing performance challenges; their future obligations are daunting. At the same time, institutions are getting more comfortable with the idea of hedge funds, which have taken steps to make themselves more institution-friendly.

Preqin also says that 32 percent of funds currently investing in hedge funds of funds will start investing directly, and an additional 8 percent are considering doing so.

In addition, more institutions are secure enough with the asset class now that they are investing in smaller funds. A good indication of what's going on comes from the real estate funds niche. Preqin says that 60 percent of the capital raised for real estate funds in the first four months of 2011 was by funds managing less than $1 billion of assets. In 2010, such funds accounted for 53 percent.

We have suggested that smaller funds with solid limited partner policies and compliance programs can overcome the historical bias toward small funds. Performance of course is also key. 

For more:
- here's the FINalternatives article
- here's a Reuters article on property funds

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