Direct investments by endowments, foundations, corporate pension funds and public pension schemes together represent a quarter of the assets of the world’s largest hedge funds, up from 22
Direct investments by endowments, foundations, corporate pension funds and public pension schemes together represent a quarter of the assets of the world’s largest hedge funds, up from 22 per cent last year and 20 per cent in 2005, according to a study conducted by financial services consultancy Greenwich Associates.
Greenwich says the study, carried out in conjunction with Global Custodian magazine, illustrates the growing importance of institutional investors to hedge funds with more than USD1 billion in assets under management.
‘The 25 per cent of assets attributed to direct investment by endowments, foundations and pensions actually understates the institutional component of the hedge fund asset base by a considerable margin,’ says Greenwich consultant John Feng. ‘Institutions are also big investors in funds of hedge funds, which represent another 25 per cent of hedge fund assets.’
The study says funds of hedge funds now rank higher as a source of assets for large hedge funds than high net-worth individuals and family offices, which contributed 21 per cent of total assets.
‘Institutions choose to invest in funds of funds to access their diversification, risk controls and general industry expertise,’ says Greenwich hedge fund specialist Karan Sampson. ‘The largest institutions may also use funds of funds to put allocated dollars to work as they search for opportunities for direct investments.’
The share of institutional assets invested in hedge funds has been growing slowly but steadily for the past several years, the study says. In 2006, U.S. institutions allocated 2.1 per cent of their total assets to hedge funds and funds of funds, up from 1.9 per cent in 2005 and 1.6 per cent in 2004.
Greenwich notes that that proportion may sound trifling until one considers the sums involved. The total institutional asset pool among the more than 1,900 institutional investors included in Greenwich Associates’ institutional research universe is USD6.6trn.
The firm says that big hedge funds with sufficient infrastructure and capacity to attract sizable institutional money are anxious to increase their business from this source, and judging by three-year institutional trend lines, their chances look promising. The allocations of US institutions to hedge funds are now on average more than double what they were in 2001.
Asked by Greenwich Associates whether they invested in hedge funds, some 36 per cent of US institutions responded affirmatively in 2006, up from 32 per cent the previous year and 29 per cent in 2004. Asked the same question about funds of funds, 25 per cent answered yes in 2006, up from 23 per cent in 2005 and 19 per cent in 2004.
Some 22 per cent of the institutions participating in Greenwich Associates’ 2006 research said they planned to increase their hedge fund allocation by 2009, compared with 2 per cent that planned to decrease that allocation.
Greenwich Associates specialises in providing benchmark information on best practices and market intelligence on overall trends. Based in Greenwich, Connecticut, with offices in London, Toronto, and Tokyo, the firm offers more than 100 research-based consulting programmes to more than 250 global financial-services companies.