Transparency: the new black.

It's highly fashionable to talk about transparency at the moment.

If only CDOs and other complex financial instruments had not been so opaque. If only we knew where all the risks have been distributed to. If only we understood which executives held margin loans over stock in their company. And so on and so forth.

Transparency has become "the new black". I suspect this won't be the last time transparency features in this column.

Transparency also featured in a global survey on alternative assets recently completed by PwC and the Economist Intelligence Unit. One key finding was that transparency and risk management were considered by investors to be just as important as performance when deciding whether to retain their managers of alternative assets.

Alternative assets, for the purposes of the survey, were defined as hedge funds, private equity, real estate and infrastructure.

The alternatives industry has grown at an astounding rate in recent times. In an era of low inflation and rising asset prices, alternatives have held out the promise of superior returns. And it's not just been individual investors chasing those-returns. A decade ago, 60-percent of hedge fund assets worldwide were owned by high-net-worth individuals. Today the reverse is true, with institutions providing 60 per cent of the funding. Alternatives have now become a mainstream asset class.

But as the industry has rocketed, the development of the infrastructure behind it does not appear to have kept pace. Investors though, have tolerated weak governance and risk management in the past few years as returns have been good. Now that returns have flattened, investor pressure for transparency is increasing.

The PwC survey found that transparency (41 per cent of investors) and the quality of risk management (41 per cent) were rated higher than performance (40 per cent) among the criteria for de-selecting asset managers--food for thought in a post credit crunch world.

Part of the anxiety revolves around asset valuations. For example, the survey revealed that 21 per cent of investors in hedge funds believed that information provided about valuation techniques was poor or very poor.

Compensation of asset managers is another prickly thorn. Only 21 per cent of investors thought private equity firms were good or very good at disclosing clear policies regarding management fees and structures.

If nothing changes, we could be headed for more regulation. Just over one quarter of the investors were happy with the regulatory regime for hedge funds. Standardisation of reporting and disclosures has some appeal. We have, however, seen evidence of self-regulation developing, with various investment providers picking up their game on transparency and disclosure. But as the industry matures, this is a debate that will continue to attract opposing views.

Interestingly, although investors now appear to have a higher appreciation of other important factors in addition to asset performance, the survey suggests that only a minority of investors have the processes in place to make appropriate assessments themselves!

And despite the effects of the global credit crunch, the study predicts the alternative asset industry will continue to enjoy rapid growth over the next three years. Investors will have to get better at asking the right questions and analysing the information they are given.