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Institutional investors delay putting more money into hedge funds

Date: Wednesday, December 3, 2008
Author: Hedge Funds Review

Almost half (46%) of institution investors expect to continue to allocate capital to hedge funds, according to the latest survey* by Preqin. The report analysed investor trends and attitudes to the asset class in 2009 and beyond.

The research and analysis showed a number of institutional investors are delaying making new investments with hedge fund managers. As institutional investors have a longer term investment horizon many still believe in the ability of hedge funds to provide returns and a significant number have seen hedge funds as some of the better performing aspects of their portfolio, the report concludes.

A majority (67.8%) of investors said they have an unfilled long-term target allocation to hedge funds. Only 5% said they would describe their activity as "mainly redeeming investments".

Three quarters of investors survey said their hedge fund investment returns had fallen short of original expectations although just over half (53%) said they were satisfied with hedge fund returns.

A total of 160 institutional investors on the Preqin investor profiles online service said they expect to make their first investments in hedge funds in the next few months. The study also reportedinstitutional investors expect to increase their market share of the hedge fund market over the coming 12-18 months.

According to respondents the most important factor institution investors look at when choosing a hedge fund manager is the performance record (37%) closely followed by risk management (26%) and reputation (14%). Factors all coming in at under 10% each include source of returns, fees, quality of personnel and client service.

The survey revealed that fund of hedge funds are the largest group of institutional investors in hedge funds by type at 26.1% followed by public pension funds (16.5%), endowment plans (15.2%0, private pension funds (12.9%) and family offices and foundations (10.8%). Asset managers accounted for 5.3%, insurance companies for only 4.8% and banks and investment companies for less than 3% each.

Institutional investors are carefully tracking hedge fund managers through the current market difficulties to evaluate which funds have produced acceptable returns. "Due to the financial climate there will undoubtedly be a number of new opportunities for investors when more financial stability returns," said the report.

Institutional investors are also expected to conduct even more thorough due diligence on future investments.

Preqin is a source of information for the alternative assets industry, providing data and analysis via online databases, publications and bespoke data requests. Preqin also works with fund managers to identify and approach institutional investors for new vehicles.

Investors were surveyed between August 2008 and November 2008.

* Overview of the Global Hedge Fund Institutional Investor Universe by Preqin. The 2009 review provides profiles for the most important 400 institutional investors in hedge funds worldwide including detailed analysis on all different investor types and also includes comprehensive analysis and profiles for all sectors of the hedge fund marketing industry.