Institutional investors are bolstering their commitment to hedge funds, but expect greater transparency and solid risk management infrastructures from managers, according to a global study by SEI in collaboration with Greenwich Associates.

The report, "Institutional Hedge Fund Investing Comes of Age: A New Perspective on the Road Ahead," indicates a need for hedge fund managers to enhance their risk management infrastructure and risk reporting, and institutionalize transparency policies to attract new capital, satisfy anxious investors, and protect their reputations.

The study found that institutional investors' confidence in hedge funds is growing, as more than half (54 per cent) said they plan to increase target allocations over the next 12 months. That confidence is conditional, however, as the demand for increased transparency and risk management were recurring themes throughout this year's study.

The focus on risk management infrastructure emerged as the second most important hedge fund selection criteria, with 75 per cent of respondents deeming it "very important." Only clarity of investment philosophy ranked higher, with 79 per cent deeming it "very important."

"The study confirms what we have been seeing and hearing from our clients -- that investors are committed to hedge funds, but managers must get and keep investors comfortable with their investment decision," Phil Masterson, managing director for SEI's Investment Manager Services division, said.

Transparency is still a concern, as more than two-thirds (70 per cent) of those surveyed pointed to a lack of transparency as their biggest worry, up from 56 per cent in 2009.

More than three out of four respondents want risk analytics from managers. 

More than half (58 per cent) of investors named liquidity risk their biggest worry in hedge fund investing, with more than 40 per cent saying they have taken steps to enhance the liquidity of their hedge fund investments.