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Citi Prime Finance survey highlights rapid shift to direct HF investment by pension and Sovereign Wealth funds

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Institutional fund managers have undertaken a dramatic shift to direct hedge fund investing following the global financial crisis, according to a new survey from Citi Prime Finance.  


The survey, “Global Pensions and Sovereign Wealth Funds Investment in Hedge Funds: The Growth and Impact of Direct Investing”, is based on in-depth qualitative interviews with nearly 60 major investors representing USD1.65 trillion in assets under management as well as hedge fund managers representing USD186 billion in assets under management, reveals that pensions and sovereign wealth funds have not only been increasing their hedge fund investment programs but are taking a more active and “direct” approach to allocating these investments, as opposed to using traditional fund of funds. This trend has significant implications for hedge fund managers seeking to attract this capital.
“While the conventional wisdom is that directly allocated capital is going only to the largest hedge fund managers, we actually found that smaller hedge funds managing between USD1 billion and USD5 billion experienced the largest net growth in 2010,” says Sandy Kaul, US Head of Business Advisory Services.
“Fund managers in this range occupy a ‘sweet spot’ for investment allocators, with interest extending as low as USD500 million in developed markets and USD250 million in emerging markets. Above USD5 billion we see a bifurcation in the industry among hedge fund managers that are limiting new investment and those that are developing into larger asset management organisations,” says Kaul.
Citi’s research indicates that the global pension and sovereign wealth fund allocation to the hedge fund asset class stands today at approximately three percent of the global pension and sovereign wealth fund asset pool of USD31 trillion, or USD820 billion. The continued growth from these sectors is discussed in depth in the survey and presents both opportunities and challenges to hedge fund managers seeking to attract these investments, which are often described as “sticky money” due to their longer-term investment horizon.
“Size is not the only factor in attracting Institutional capital, and other aspects of maturity and stability are equally important in reaching an institutional threshold to make investors attracted to these managers”, says Chris Greer, Global Head of Capital Introductions. “Educating hedge funds on what it takes to attract and maintain these long term investments is becoming a key role for Prime Brokers who understand both sides of this investor-hedge fund manager dynamic."

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