STT State Street Corporation

State Street Corporation (NYSE: STT), the world�s leading provider of financial services to institutional investors, released today its third institutional investor hedge fund study. State Street conducted the study late last year in conjunction with the 2006 Global Absolute Return Congress (Global ARC). Asset owners participating in the study included representatives from global corporate pensions (21 percent), public and government pensions (32 percent), and endowments and foundations (44 percent), with investable assets totaling more than $1 trillion. According to State Street�s study, more than half of respondents indicated that their governing bodies are more comfortable investing in hedge funds today than they were 12 months ago. Reinforcing this interest, more than half of boards also spend 15 percent or more of their time on the subject. �The findings of our study reinforce the industry trend we�ve been witnessing among our client base ? investment boards are overwhelmingly accepting that hedge funds are a viable option for their investment allocations,� said Gary Enos, executive vice president and head of State Street�s alternative investment servicing business. �They are also discovering the various ways hedge funds can be incorporated into portfolios based upon investors� risk appetite, return targets and overall investment objectives.� Results also show that the percentage of asset owners investing in alternatives increased significantly over last year. This year, only 4 percent of asset owners indicated they have no hedge fund investments, down from 16 percent last year. All of the study participants said they allocate assets to private equity. Ongoing Challenges Cited Include Risk Management, Accurate Valuations Half of institutional investors said the negative financial effects of recent highly publicized hedge fund manager debacles on institutional portfolios have prompted their boards to call for a more robust risk management program. Nearly half cited a need for additional reporting and analysis on the part of hedge fund managers and more rigorous due diligence practices. Less than 5 percent of institutions plan to add to their staff to address these concerns. More participants will also increase use of third-party resources for due diligence, fund screening and/or investment recommendations. In addition, nearly half of institutions acknowledge that in-house risk management tools and analysis could be more robust. A majority of institutions said they find it difficult to gain a portfolio-wide view of risk, and that aggregating risk statistics provided by all hedge funds in their portfolio was problematic. The same number also agreed that obtaining an accurate valuation of hedge fund holdings can be problematic. �The tools, methods and best practices for managing risk will further develop as hedge funds become a tried and true staple of institutional portfolios,� said Enos. �Particularly in light of regulatory pressure and changes in accounting practices, asset owners will continue to push hedge fund managers and third-party service providers, such as administrators, to develop and deliver enhanced risk and transparency solutions.� More Direct Hedge Fund Managers Are Hired The number of hedge fund managers hired directly by a single institution has increased. More than half (56 percent) of the study participants said they invest with more than 10 direct hedge fund managers. The prior year, only 48 percent said they invested with more than 10 direct managers. This shift implies that portfolio construction is following current empirical evidence supporting a properly diversified portfolio of hedge funds to mitigate systemic risk. By contrast, the number of funds of hedge funds used by institutions appears to have declined. In the 2007 study, nearly a third of institutions indicated they used no fund-of-funds managers, as compared with just over a quarter of institutions in the 2006 study. Nearly two-thirds (60 percent) said they employ the services of between one and three fund-of-funds managers and only 8 percent used four or more. This represents a shift from the 2006 study, in which 43 percent of institutions said they used between one and three fund-of-funds managers and 29 percent used four or more. Evidence suggests that reduced use of fund-of-funds is likely due to two factors: growing sophistication and familiarity with hedge fund investing, and a cost-benefit analysis in favor of a �do-it-yourself� approach. A Focus on Fees The results of State Street�s study also show that institutions are concerned about hedge fund fees. High fees offsetting returns was identified as the greatest threat to hedge fund investing by nearly a third of institutions. That concern was closely followed by headline risk (20 percent) and investment loss (20 percent). �As fees continue to eat away at precious returns, more institutions will balk at paying �alpha� fees for �beta� performance,� said Jane Tisdale, senior managing director of Absolute Return Strategies at State Street Global Advisors. �Asset owners will likely begin to force fee compression for all but the most successful funds.� For a copy of the State Street hedge fund research study, please contact publicrelations@statestreet.com. Next month, State Street will launch the second of its State Street Vision papers ? State Street branded thought leadership white papers including input and insights from across the company. The inaugural Vision paper was on the topic of Asian Bonds and the second paper will address timely issues within the hedge fund arena. State Street Corporation (NYSE: STT) is the world's leading specialist in providing institutional investors with investment servicing, investment management and investment research and trading services. With US$11.9 trillion in assets under custody and US$1.7 trillion in assets under management as of December 31, 2006, State Street operates in 26 countries and more than 100 geographic markets worldwide. For more information, visit State Street's website at www.statestreet.com. This news release may contain forward-looking statements, as defined by federal securities laws, including statements about the financial outlook and business environment. Any such statements are based on current expectations and involve a number of risks and uncertainties. Important factors, including those mentioned in this news release, that could cause actual results to differ materially are set forth in the company�s 2006 annual report and subsequent SEC filings. They include risks and uncertainties relating to the pace at which State Street adds new clients or at which existing clients use additional services, the value of global and regional financial markets, and the dynamics of the markets State Street serves. State Street encourages investors to review its annual report and SEC filings in conjunction with this announcement and prior to making any investment decision. The forward-looking statements contained in this news release speak only as of the date of release, March 21, 2007, and the company does not undertake to revise those forward-looking statements to reflect events after the date of this release.