Institutional investors' appetite for hedge funds increases - Preqin

Date: Wednesday, July 13, 2011
Author: Charles Gubert, COO Connect

Approximately 32% of institutional investors intend to allocate capital into hedge funds over the next 12 months, according to data from research specialists Preqin.

This could result in between $125 billion and $195 billion of new assets flowing into the industry. Institutional investors are increasingly opting for direct investments into hedge funds at the expense of funds of hedge funds (FoHFs). Preqin highlighted the University of Houston System Endowment “has been increasing its weighting to direct investment over the past two years with the intention of continuing this path over the rest of 2011.” A recent poll by Citi Prime Finance identified FoHFs’ added layer of fees and their excessive diversification as the main reasons for investors’ dissatisfaction.

However, FoHFs remain the largest capital allocators to hedge funds. “It is clear that of investors, FoHFs are looking for new hedge fund opportunities in the greatest numbers with half of all FoHFs looking for new vehicles over the next 12 months,” said the report. The $23 billion multi-manager Permal could add up to 25 new funds to its portfolios over the next year, for example.

One third of sovereign wealth funds said they had significant interest in making new hedge fund investments while 36% of public sector pension plans acknowledged they were on the look- out too. “Public pension funds have been increasingly adding hedge funds to their portfolios over the past five years and despite the global recession remain committed to the diversification benefits these vehicles can offer within their portfolios,” it read.

Investors in Europe had the greatest appetite for alternatives with 45% stating they had plans to invest in funds compared with 29% for North America and 32% for Asia and the rest of the world. “Many European investors have been relatively conservative since the market crisis with few actively allocating fresh capital to the asset class. Despite this, there has been a restoration of confidence among European investors who, further buoyed by better performance and the proliferation of new structures such as Ucits, have begun to reallocate,” it said.

Some 87% of investors view long/short equity as their preferred strategy and 58% are adopting an opportunistic approach. Macro hedge funds are also a popular choice as investors seek to take advantage of currency movements, geopolitical events, inflation and interest rate changes. Managed accounts continued to grow with 19% of those surveyed saying they intended to invest in these vehicles in the next year. Emerging managers also look to benefit with 28% of investors saying they are more “open to marketing from emerging managers than they were one year ago.” However, 60% said managers must have a track record of at least three years and $100 million in assets before being considered.

“The future is looking bright for the industry,” said Katherine Johnson, the report’s author. “Investors are seeking a wide range of strategies and structures and therefore it is vital that managers have the best intelligence on these investors if they are to gain a slice of this capital,” she added.