Pension funds and sovereign wealth funds account for half of all hedge fund institutional capital

Amy Bensted, Preqin

Institutional investors now have more than USD2.00 trillion invested in hedge funds, and more than 5,250 institutions – 45 per cent of the total institutional investor universe – actively invest in the asset class, according to Preqin.

A small proportion of these investors, though, account for the greatest allocations, with just three investor types representing more than half of all institutional capital in hedge funds. Public pension funds and private sector pension funds represent 9 per cent and 15 per cent of hedge fund investors respectively, but they account for 22 per cent and 19 per cent of institutional capital in the asset class.
 
Similarly, just 24 sovereign wealth funds invest in hedge funds, but collectively they account for 10 per cent of invested capital.
 
This is in contrast to endowments and foundations active in the asset class: numbering 602 and 956 investors respectively, these institutions both allocate an average of 19 per cent of their assets to hedge funds.
 
However, despite the large number of both groups investing nearly a fifth of their total assets in hedge funds, the relatively small size of foundations and endowments means that the sum of their total investments are only on par with sovereign wealth funds, each accounting for 10 per cent of institutional capital.
 
In terms of hedge funds investment, the largest number of active institutions are foundations, of which there are 956. This is followed by private sector pension funds (776) and fund of hedge fund managers (684).
 
However, public pension funds have the greatest share of capital invested (22 per cent), and together with private sector pension funds (19 per cent) and sovereign wealth funds (10 per cent) they account for more than half of all institutional capital invested in hedge funds.
 
Eighty-three per cent of endowments and 66 per cent of foundations invest in hedge funds. Just 34 per cent of sovereign wealth funds and 29 per cent of insurance companies do, the only investor types with a minority active in hedge funds.
 
Endowments and foundations both have average allocations to hedge funds of 19 per cent, the highest levels. Insurance companies have the lowest allocations, averaging just 4 per cent.
 
Average return expectations have stayed level or gone up across all investor types between 2016 and 2017. Insurance companies have the highest expectations (6.8 per cent), while sovereign wealth funds have the lowest (4.4 per cent).
 
“Hedge funds have become an important part of the portfolios of many institutional investors,” says Amy Bensted (pictured), Head of Hedge Fund Products at Preqin. “Almost 5,300 institutions globally are active in the asset class today: collectively they invest more than USD2 trillion in hedge funds, accounting for 58 per cent of the total capital in the industry. However, more than half of this USD2 trillion is invested by just three investor types: public and private pensions and sovereign wealth funds. Although many more endowments and foundations are actively investing in hedge funds, typically with much higher allocations to the asset class, their total allocations are only on par with these groups, due to the sheer size of many of these pension and sovereign wealth funds.”
 
“It is perhaps not surprising that the largest investors carry a great deal of influence in the asset class. However, beyond these large and influential investors there are thousands of other institutions all using hedge funds within their portfolios today. Each has their own unique challenges, so gaining an understanding of their needs on both a macro and an individual level is an important first step for fund managers seeking to raise capital from institutional investors in 2018.”