Institutional investors are investing more in hedge funds, but seeking more from the managers they use, according to a global survey conducted by Barclays and the Alternative Investment Management Association (Aima). Private equity-style co-investment, for instance, is a growing trend.

“The current trend is to move away from [investors] treating hedge funds as mere products into which to invest a limited part of their portfolio for diversification reasons, toward instead viewing them as means to access opportunities and tailor the risk-return profile of their entire portfolio,” said the report.

Sixty-eight percent of the 30 investors surveyed – accounting for $260 billion of investments in hedge funds – had at least one partnership with a manager that goes beyond the scope of a traditional relationship. There was no earlier figure to compare this to.

And managers are increasingly raising capital from institutional investors. As at the third quarter of 2013, 61% of the $2.5 trillion of assets managed by hedge funds globally came from institutions, compared with 55% of $1.91 trillion in 2010.

The findings suggest investors are taking a more active role in understanding or influencing the way their investments generate alpha. As investors gain more experience with hedge fund investing, they are looking for fewer but more meaningful relationships with managers, the report noted. This includes turning more to co-investment structures, which are more typical in the private equity space.

These co-investment vehicles, which often have lock-up periods of two to three years, offer a way for investors to partner managers in opportunistic investments that may not fit into commingled fund vehicles. Examples include equity funds with longer lock-up periods, such as activist or credit strategies. Hedge funds typically have concentration or liquidity limits, and co-investments allow them to go beyond these limits, the report said.

Multi-strategy firms were most often cited as good partners by investors, followed firms focused on macro or asset-class strategies such as credit and equity. Investors also saw funds of hedge funds as good partners for co-investments or seeding new products, as they depend on innovation to stay competitive within their own universe, and are therefore seen as open to new investment solutions.

Of the 21 managers surveyed, 75% said they had investors they viewed as partners. Meanwhile, hedge fund manager themselves preferred pension funds as partners because of their large asset base and appetite for bespoke solutions. While sovereign wealth funds (SWFs) could make good partners, “some hedge funds we spoke to are also mindful that SWFs are also in a position to compete with them”, the report said.

Managers did not see family offices, endowments and foundations as ideal candidates for partnership because they tend to have plentiful resources relative to their AUM and a smaller asset base than pensions.

Indeed, not all managers are keen on forging closer partnerships with, or offering co-investment vehicles to investors. Some hedge funds are worried about being seen to prioritise investors or favour one over another. In any case, some fund managers’ investment approach does not allow them to provide the greater transparency that would be necessary in a partnership, found the survey.

Pension funds represented by far the biggest investor segment in the survey (40% of respondents), followed by consultants and family offices (17% each). Together, the 30 investors had $260 billion of assets invested in hedge funds.

Some 80% of that $270 billion controlled by 21 managers who were surveyed comprised funds ranging in size from $5 billion to $20 billion. Forty-three percent of the managers ran multi-strategy funds, with the other strategies being credit (29%), equity (14%), macro or fixed income (10%) and systematic (4%).