Sovereigns, Pensions Invest More In Hedge Funds; Do It Directly

Jun 27 2011 | 10:29am ET

Sovereign wealth funds and pensions are not only investing more in hedge funds, they’re rolling up their sleeves and doing their investing directly, rather than relying on funds of funds, according to a new study from Citi Prime Finance.

The study, based on interviews with almost 60 major investors representing $1.65 trillion in AUM and hedge fund managers with $186 billion AUM, also had good news for smaller funds:

“While the conventional wisdom is that directly allocated capital is going only to the largest hedge fund managers, we actually found that smaller hedge funds managing between $1 billion and $5 billion experienced the largest net growth in 2010,” said Sandy Kaul, U.S. head of business advisory services.

“Fund managers in this range occupy a ‘sweet spot’ for investment allocators, with interest extending as low as $500 million in developed markets and $250 million in emerging markets. Above $5 billion we see a bifurcation in the industry among hedge fund managers that are limiting new investment and those that are developing into larger asset management organizations,” said Kaul.

Citi’s report, “Global Pensions and Sovereign Wealth Funds Investment in Hedge Funds: The Growth and Impact of Direct Investing,” says that global pension and sovereign wealth funds today allocate about 3%  ($820 billion) of their $31 trillion asset pool to hedge funds.

Such investments aren’t without implications for hedge fund managers, according to the survey, which says institutional investments are often described as “sticky money” due to the investors’ longer-term investment horizons.

“Size is not the only factor in attracting institutional capital, and other aspects of maturity and stability are equally important in reaching an institutional threshold to make investors attracted to these managers," said Chris Greer, global head of capital introductions.

The survey also revealed that direct allocator hedge fund portfolios typically consist of 20-50 managers. Interviewees usually made one to four allocations per year, writing few, but large tickets ranging from $25 to $100 million. Investors also stressed the importance of “partnership” with their selected managers.

Greer said the role of educating hedge funds in “what it takes to attract and maintain these long-term investments” is falling to prime brokers who “understand both sides of this investor-hedge fund manager dynamic.”

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