Global institutional investors are increasingly comfortable with investing in hedge funds but have concerns about managing the risk, according to a survey conducted by State Street.

The $11.9 trillion custodian polled an undisclosed number of institutions that manage a combined over $1 trillion of assets.

A string of public hedge-fund debacles (unnamed by the survey but presumably the likes of Amaranth) have prompted 50% of investors to call for a more robust risk-management program, while 46% said they will also require additional analysis and reporting from their hedge-fund managers. And 38% say they will demand more transparency from their managers.

Much of these concerns are about investorsÆ own capabilities to deal with hedge funds. State Street says 48% of institutions indicated their in-house risk-management tools and analyses could be more robust. About one-fifth of respondents admit they donÆt have an adequate understanding of hedge funds.

Moreover, 64% of institutions say they find it difficult to gain a comprehensive view of risk among their hedge-fund portfolios. The same percentage says obtaining an accurate valuation of hedge-fund holdings is challenging. For those respondents who have trouble in this area, a majority are solely responsible for the valuation and 47% donÆt have an independent administrator.

State Street sells software and solutions to asset owners for risk management, fund accounting, valuation calculations and other services.

Otherwise the findings show investors are comfortable with hedge funds. Nearly two-thirds of investors have 5% or more of the portfolio dedicated to hedge funds, and all respondents now have at least some allocation to private equity. Over half of institutions invest with more than 10 direct hedge-fund managers and 44% invest with more than 20. The influx of new investors has also shown more plans are choosing to use funds of funds û but while the absolute size of assets in funds of funds is rising, it is among an increasingly concentrated number of them: 60% of institutions use only one to three funds of funds, up from 43% last year.

The greater use of single-strategy funds, and the concentrated use of funds of funds, means institutionsÆ senior directors are spending more time dealing with this area. The survey shows 80% of institutionsÆ governing boards spend more than 10% of their time discussing alternative investments. And while 74% say hedge-fund results have matched expectations regarding diversification, thatÆs down from 100% who expressed this view last year. And 32% say disproportionately high fees threaten to offset returns.