Transparency and risk management are considered by investors to be just as important as performance when deciding whether to retain their managers of alternative investments, according to a new report by PricewaterhouseCoopers (PwC).

A global survey of 226 institutional investors and alternative investment providers, conducted by the Economist Intelligence Unit on behalf of PwC, found that flattening returns have contributed to investor pressure for more and better governance.

The quality of compliance and risk management process (41% of investors) and transparency (41% of investors) were rated higher than performance (40% of investors) among the criteria for deselecting investment providers.

“Our findings back up the belief that when returns start to moderate, investors focus more intently on operational infrastructure” says Raj Kothari, PwC partner and leader of the Canadian investment management practice. “Indeed the survey shows that this is a key ingredient and not just an element in keeping alternatives in their portfolios in a subdued environment.”

Despite this, investors have been slow to adapt risk assessment processes. More than half (53%) say that they have made no change to their risk management policies despite an increased allocation to alternatives.

The study, which covers hedge funds, private equity, real estate and infrastructure funds, also reveals a gap in perceptions between investors and providers. Investment firms largely believe they are good at managing risk. They rate themselves “effective” in the accounting and reporting of transactions (67%) and policies to protect against fraud (65%). According to the PwC survey, investors largely disagree. For instance, just 18% of hedge fund investors think valuation policies are effective and only 16% think IT security is good.

Although many alternative investment providers are suffering from the effects of the global credit crunch, the report predicts the industry will enjoy rapid growth over the next three years.

Among investors, 41% expect to increase their allocation to real estate, 40% to private equity, 35% to commodities and 33% to hedge funds. Very few plan a smaller allocation to any of these sectors.