Isaac Souede, chief executive and chairman of fund of hedge funds group Permal, talks about the challenges facing the industry, the creation of alpha and how the industry needs innovation to achieve alpha.

The financial crisis has "certainly sharpened the choices that managers in the industry make in terms of what is offered to clients in terms of liquidity, in terms of the span of alpha creation and in terms of being crystal clear as to what objectives and outcome in a fund need to be," declares Isaac Souede, chairman and chief executive of Permal.

In an interview covering a range of topics including the future of the fund of hedge funds industry, innovation and emerging markets and managers (including those based in China), Souede gives his views on what the industry needs to do in order to survive and thrive in a challenging economic environment.

"There's a feeling that the way money is managed in the industry, certainly post-2008, needs to be more transparent. I think there's been a response to that by the industry," he says.

"There's also been a better matching of expectations to maturity of investing," he adds.

For Permal, the challenge has been how to "allocate and reallocate in a much faster way. Because it's frustrating when you've got ideas and you have to wait for the next quarterly opening to implement those ideas," notes Souede.

Permal's answer to this problem is to create a suite of separate accounts with managers. Souede believes this allows Permal to be "an activist" fund manager and gives the fund of hedge funds the flexibility it needs to take advantage of good ideas in a timely fashion.

"For Permal, the task now is to outperform industry indexes on a risk-adjusted basis," says Souede.

On the creation of alpha, Souede admits: "It's something really rare. But from a practical investor standpoint it really is about risk-adjusted return."

Looking into 2012, Souede says the industry will continue to become more institutionalised. With size come issues of malleability, transparency, clarity and reporting. "There will be more responsibility the bigger [the industry] becomes," admits Souede.

He expects volatility and uncertainty to remain in 2012. "We like the macro space right across the spectrum," he says. "We like the long and short space in non-US, non-European markets. I also think when you've got periods of stress you end up with distress. And in distress comes event-driven investing, just as we saw at the end of 2008. So that's the last one we really are favouring right now," he says.

Souede was the winner of the Tenth European Fund of Hedge Funds Award for long-term achievement in funds of hedge funds (awarded to an individual).