Asset owners looking for high returns without paying high prices are being forced to innovate.
Institutional investors are not only seeking strategies such as alternatives, global macro and absolute return but also are engaging in co-investments and partnering with emerging managers to get more bang for their buck.
"As you get fee transparency, it does become harder to allocate to the extremely high-cost asset managers such as hedge funds and private funds," Stanford University researcher Ashby Monk said in an email.
"Fee and cost transparency is a catalyst for innovation within plans, as boards begin to realize that there must be another way to achieve their returns without paying so much to Wall Street," he added.
Mr. Monk said he is seeing three innovations within the institutional investment industry: better use of technology; collaborative models among asset owners; and creating platforms to seed new managers.
As the demand for fee transparency increases and many hedge funds struggle to produce high returns, several pension plans have either been steadily moving away from or reducing allocations to the asset class.
In July, trustees of the $17.2 billion Illinois State Board of Investment, Chicago, eliminated hedge funds as an asset class. That followed ISBI's decision in February 2016 to reduce its hedge fund allocation to 3% from 10%.
In March, the $27.5 billion Pennsylvania State Employees' Retirement System, Harrisburg, replaced a dedicated hedge fund allocation with a multistrategy allocation that includes hedge funds among other strategies.
PennSERS spokeswoman Pamela Hile said in an email that the new multistrategy structure opens the door for more investment opportunities.
"While in the past, if staff and consultants identified a promising opportunity that didn't fit squarely within our existing asset class structure, we would have to pass on the opportunity," she said.
Ms. Hile added: "While hedge funds and private equity managers generally charge fees based on committed capital, managers in other strategies charge fees on invested capital only. Paying a fee on invested capital only is more desirable to the board than paying fees on committed capital."