Most hedge fund investors don't care whether the entities they invest in are based in offshore or onshore domiciles.

That was one of the findings of a report by global accountancy firm KPMG, entitled: "Transformation: The Future of Alternative Investments".

There has been much speculation in the wake of the financial crisis that the alternative investments industry is likely to redomicile from offshore to onshore, as regulation and transparency requirements tighten.

But KPMG found that 81 percent of hedge fund investor respondents were happy to continue investing in funds based offshore.

Also, while regulation has been widely promoted as a way to protect investors, the report finds that the majority are against it.

Reasons cited include the belief that regulation will not produce any tangible benefits, it will add costs and bureaucratic burden, it will stall the industry's engine of creativity and it will limit choice.

KPMG Bermuda lead investments partner Craig Bridgewater said: "There's an interesting distinction here. While investors are clearly looking for products with increased transparency and liquidity, they do not seem to be demanding regulated products.

"Nor are they particularly concerned with the question of domicile, which runs counter to how much attention the onshore/offshore debate has attracted lately.

"Managers would therefore, be wise to maintain their offshore fund range for their bedrock investors even while EU domiciles develop complimentary structures onshore."

Although the Cayman Islands is the leading offshore funds domicile, Bermuda also has a significant funds industry.

According to Bermuda Monetary Authority figures, the total net asset value of Bermuda's funds was more than $1723 billion by the end of the first quarter of this year. However, the number of funds on the Island declined significantly, hit by redemptions and plunging asset values during the financial crisis.

By the end of the first quarter, there were 943 funds on the Island, compared to 1,133 12 months earlier.

The KPMG report identified a dramatic shift in the balance of power from fund managers to institutional investors.

Anthony Cowell, partner at KPMG in the Cayman Islands and principle author of the report says: "Historically, anyone considering an investment in alternatives had to invest on the manager's terms. Today, the picture of the industry has been turned on its head; it's now one in which investors are firmly in the driving seat and, fundamentally, investors want to see managers interests more closely aligned with their own."

The prospects look good for growth, with over 50 percent of institutional investors surveyed said they intend to increase their allocations to alternatives in the next three years. Some anticipate an allocation of over 10 percent of total assets.

Seventy percent of managers said client service was their top priority after performance.

KPMG found that fund of funds did not have a good market crisis, according to their investors. As a result, larger institutional investors are moving to an allocation model with a clear trend in favour of direct investment and managed account platforms, the latter for reasons of security, liquidity and transparency.

In closing Mr. Bridgewater summarised: "Led by demands from institutional investors, the alternatives sector is going through a period of transformational adjustment and while the industry is no stranger to change, this time around it will be profound."

To download a full copy of "Transformation: The Future of Alternative Investments" go to www.kpmg.bm.