The level of due diligence required to assess the people, process and philosophies of both traditional and alternative investment managers can only be achieved with adequate resources and staffing, the study says.
However, the typical US institution employs only two professionals to select and supervise external investment managers - a number that was essentially flat from 2007 to 2008 but is down from the 2.5 average across all institutions in 2006.
Only the largest public and corporate pension plans expanded internal staffing for manager selection and supervision last year, with the average staff among corporate plans with more than USD5bn in assets increasing to 3.4 full time equivalents in 2008 from 2.9 in 2007, and average staffing among public plans with at least USD5bn increasing to 5.8 FTEs from 4.5 FTEs.
'It is impossible to identify those managers with the skill and consistent, repeatable processes needed for investment success without sophisticated due diligence capabilities,' says Greenwich Associates consultant Dev Clifford. 'The real lesson of 2008 is that institutions need to either build up these capabilities in-house, or acquire them externally. Doing without is not an option.'
In January I linked to a Barry Ritholtz post about underinvestment in hedge fund due diligence.
Here is a another Greenwich Associates study from January, co-authored with SEI, called "Hedge Funds Under the Microscope."