Pension Funds Look Increasingly To Smaller Hedge Funds

May 4 2011 | 12:02pm ET

Small can apparently still be beautiful, at least to institutional investors who are reported to be taking a closer look at smaller hedge fund managers.

"Over the next 10 years we will see a significant increase in the percentage of pension plans investing a meaningful percentage of their hedge fund portfolio away from the largest managers to small and mid-sized managers,” says Doug Rothschild, managing director of Agecroft Partners.

Agecroft believes the shift will happen in part because managers of smaller funds are more “nimble.”

It may also happen because small funds have been generating big returns: hedge funds managing under $50 million returned an aggregate 13.1% on an annualized basis in the 15 years to December 31, 2010, according to Hedge Fund Research. For funds managing over $1 billion, that number was 11.62%.

Smaller funds also outstripped the 10.23% annualized return of the HFRI Fund Weighted Composite index for the same period.

No wonder, then, that pensions like the California Public Employees’ Retirement System and the New Jersey Division of Investment are looking at smaller funds. According to Pensions & Investment, one corporate pension fund has put $150 million in a fund of funds that invests in emerging minority- and woman-owned hedge funds.

Agecroft Partners expects pensions to follow the example of endowments, which have ceased to view hedge funds as a separate asset class—many leading endowments and foundations are invested primarily in alt asset managers, including large allocations to mid-sized hedge funds.

 


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