Hedge funds could more than double their assets under management to $5 trillion by 2016, according to new research from Citi Prime Finance.
Citi’s survey, its third annual, is based on interviews with 73 “industry participants” representing $821 billion in assets allocated, managed or under advisement. Entitled Institutional Investment in Hedge Funds: Evolving Investor Portfolio Construction Drives Product Convergence, it says institutional investors are refocusing allocations based on risk budgets rather than dollar-weighted allocations alone.
“We see a second wave of institutional allocations to hedge fund strategies, as well as new allocations to long-only strategies managed by hedge fund firms,” said Sandy Kaul, U.S. head of business advisory services at Citi Prime Finance.
Citi says the first wave ran from 2003 to 2007 and saw institutions pour over $1 trillion into alternative assets.
“While institutions have been allocating to hedge funds for years, such investments were considered to be on the periphery of core portfolio holdings,” said Alan Pace, head of Citi Prime Finance. “That is no longer the case. Today, with investors more focused on risk alignment within the overall portfolio, hedge fund allocations will play a central role in institutional portfolios in the years ahead.”
The survey suggests global assets invested in hedge funds could rise from $2.1 trillion today to over $5 trillion. Citi says institutional investors could allocate an additional $1 trillion to hedge funds as they attempt to “insulate against risk” and diversify their portfolios.
The survey says there could be an additional $2.0 trillion in new allocations to hedge fund firms in the form of regulated alternatives and long-only products. In support of this theory, Citi points to the mature hedge fund firms leveraging their deep infrastructures and resources towards creating these offerings.