Institutional investors are beginning to view hedge funds in a new light, according to allocation consultancies.

More and more investors are moving away from keeping their hedge funds investments segregated in alternative investment portfolios to are grouping them with the rest of their investments by risk-return drivers.

“We encourage our clients to put hedge funds across their portfolios,” said Neil Sheth, partner, director of alternative asset research at NEPC, during the Hedge Fund Investor Leadership Summit in Midtown Manhattan.

“A lot of our clients are moving their equities hedge funds into their equities portfolios,” he said. “And if they are credit hedge funds then into their credit portfolios instead of just having this category called ‘hedge funds.'”

Fellow panelist Chris Walvoord, partner, global head of hedge fund research at AON, also has seen a similar trend among his firm’s client base.

“If the risk-return profile for a hedge fund and some other strategies are similar, we will put them in the same category,” he added.

The pair, however, was quick to note that the trend was far from universal.

“There are clients of ours that still have hedge funds portfolios that their committees want to have and that is how they want them monitored,” said Sheth. “I don’t expect all of our clients to transition their portfolios to the former.”

“Most of the clients with whom we work tend to have pretty strong views on how they want to structure their portfolios,” agreed Walvoord. “It is our job to help them fill in those portfolios and make sure that they are not missing anything for the most categories.”

Some of this change may be due to how allocators themselves view what hedge funds bring to the table.

Over the past few years, the industry as a whole has suffered from a risk-return perspective, which Sheth attributed much of it coming from a lack of exposure to the market.

“With the market, if you are at the bottom of the capital structure for the last seven to eight years you have been awarded by that,” he said.

Sheth viewed allocators who label everything as “alpha” or “beta,” and only want to pay for alpha as a major stumbling block.

“You talk with most managers, especially the managers who are not quant managers, a lot of the ‘skill’ is being in the market,” he said.

“Part of what the managers are offering is access to markets, and some have access to different markets in different ways than most of the other managers,” agreed Walvoord. “I think that is one of the value propositions of hedge funds that we try to give to our clients.”