Hedge funds rely less on the rich - survey

Date: Thursday, June 17, 2010
Author: Reuters

Hedge funds receive nearly three-quarters of their capital from institutional investors, according to a survey released on Wednesday that shows how these portfolios are no longer reserved for the rich but are investing nest eggs for teachers, firefighters and janitors.

It takes pension funds and endowments roughly 3 months to select a hedge fund, the survey shows, and they are very choosy, with 56 percent selecting only about 10 hedge fund investments a year.

"The institutional sector of the hedge fund market has become more important in the wake of the market tumult, as these investors have stuck to the asset class in much greater numbers than the high-net-worth sector," consultants at Preqin wrote. Preqin, which monitors industry consultants, prepared the survey based on responses from 50 institutional investors during the month of May.

Since the financial crisis peaked in 2008, when hedge funds on average lost about 19 percent, the $1.6 trillion industry is now reporting new interest in these portfolios.

And a number of prominent managers who have left hedge fund firms like Atticus Capital, Farallon Capital, SAC Capital Advisors and investments banks like Goldman Sachs are seeking to tap into the new fund raising environment.

How much and how fast these new firms can raise cash remains to be seen, industry analysts said, noting that in general it is tougher than ever to get investors to commit.

Just over half of the investors surveyed by Preqin said they rely on two sources to introduce them to hedge fund managers they might want to put money with.

Especially in the United States, consultants are playing a bigger role in introducing hedge fund managers to pension funds.

For example, the State of Wisconsin Investment Board is currently using consultant Cliffwater to help identify suitable hedge fund managers who will invest roughly 2 percent of the state's $69.6 billion fund.

At the same time, 42 percent of the investors said they find managers by networking and through introductions at conferences, while 20 percent rely on so-called capital introduction teams at prime brokers and another 20 percent use databases.

Investors acknowledge that they are often overwhelmed with proposals from managers -- Preqin put the number of proposals to actual investments at 60 to 1 -- but investors are also ready to give the rejected ones a second look.

Roughly 72 percent said they would reconsider managers they initially rejected.