Institutions Committed To Hedge Funds Despite Falling Returns

Jul 1 2008 | 6:16am ET

Drawdown? What drawdown? Last year's downturn in hedge fund performance has not deterred institutions from investing in the asset classes, according to research from Greenwich Associates and Global Custodian.

The share of hedge fund capital provided by institutions was unchanged from 2006 to 2007, following several years of steady growth. Nevertheless, pension funds, endowments and foundations remain strongly committed to the asset class, directly providing 13% of the average hedge fund's assets under management and an additional 23% via funds of funds.

“High-net-worth individuals and family offices remain the biggest sources of assets for the average hedge fund, accounting for 37% of the total, which does not include about 10% of assets provided by the funds' employees and general partners,” said Greenwich consultant John Feng.

Institutional investors have overtaken high-net worth individuals and family offices as a source of assets for the world's biggest hedge funds. Twenty-five percent of these funds' assets come from direct investments by institutions, while high-net worths and family offices account for 22% of assets. In terms of importance to funds with more than $1 billion in assets, both of these sources rank behind funds of funds, which provide 27% of total assets, up from 25% a year ago, according to Greenwich.

In the U.S., which accounts for the vast majority of global institutional hedge fund investment, nearly 45% of institutions invest in hedge funds, which had grown to represent 2.6% of institutional assets as of 2007—up from 2.2% in 2006 and 1.9% in 2005. Although those percentages seem modest, when converted to dollar terms U.S. institutions' investments in hedge funds totaled some $195 billion in 2007, up from $140 billion in 2006 and $113 billion in 2005.

Twenty-three percent of U.S. institutions said they planned to increase their allocations beyond current levels by 2010; only 2% said they planned to reduce them. Feng noted that average allocations at the country level include many institutions that do not invest in hedge funds at all. “Many active hedge fund users have devoted much larger shares of their assets. For example, U.S. endowments that describe themselves as active hedge fund investors devote on average 16.5% of their total assets to hedge fund investments,” he said.


In Depth

JOBS Act Propels Real-Estate Crowdfunding Platform

Oct 21 2014 | 2:57am ET

If D.J. Paul were a real estate development, he would be described as “multi-use...

Lifestyle

Balyasny Pays Over $6M For Lakefront House

Oct 22 2014 | 10:29am ET

A venture headed by hedge fund manager Dmitry Balyasny just paid $6.2 million for...

Guest Contributor

PAAMCO: European Equity Exposure - Challenging Year, But All is Not Lost

Oct 16 2014 | 4:12am ET

European equity hedge fund managers have had a tough time so far this year. The...

 

Videos

Editor's Note

    Guidelines for Guest Articles

    Oct 22 2014 | 9:46am ET

    We are always looking for guest articles from hedge fund managers and buy-side firms.

    If you are interested in submitting a contributed piece for possible publication on FINalternatives, please take a look at the specs. Read more…

 

Futures Magazine

October 2014 Cover

Deeply flawed risk benchmark

Most traders agree that proper risk management is the key to successful trading. However, many traders depend on the deeply flawed measure of standard deviation as a benchmark of risk. Here we put it ...

The Alpha Pages

TAP July/August 2014 Cover

The Alpha Pages Interview: Senator Rand Paul

Senator Paul sat down in the debut series of the Alpha Pages Interview to discuss the broken tax code, regulation surrounding Bitcoin, and his plans for the 2016 Presidential election.