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Institutional Investment in Hedge Funds: Evolving Investor Portfolio Construction Drives Product Convergence
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Sovereign wealth funds emerged even later as an institutional
category. The majority of these participants began to
deploy excessive cash balances to diversify their income
streams only in the past decade. Interest in alternatives
and hedge funds did not really emerge until the mid-2000s,
although these participants were able to gear up their
allocations more quickly as they had large, internally directed
investment teams.
Our estimates show sovereign wealth funds having diverted
7.6% of their total assets to hedge funds by 2011.
2011-2012 Performance Raises Concerns
About Hedge Funds
While most survey participants expected interest from these
participants to continue higher, some respondents expressed
concern about hedge funds’ relative level of underperformance
to the equities markets in the past year.
As shown in Chart 15, hedge fund returns protected investors
on the downside relative to the broad equity markets in only
3 of the past 15 months between January 2011 and March 2012.
They were equally flat or down in an additional 3 months, but
they significantly underperformed in 9 of the last 15 months,
failing to capture even half as much of the upside gains in
6 of those months and were down when the overall markets
were up in 2 of those months. Even more worrying was
November 2011, when the major hedge fund indices were
down more than broad equity market indices were down.
This disappointing performance has concerned many market
participants and caused some investors to question their
core assumptions about the role hedge funds play in their
overall portfolios.
Some survey participants worried that there could be a loss
of confidence in hedge funds and that investors may begin
to rethink their level of interest. At a minimum, investors
are calling into question how well directional hedge fund
strategies will fare in the coming period.
0%
5%
10%
15%
20%
1990 1993 1996 1999 2002 2005 2008 2011
Endowments &
Foundations
Sovereign
Wealth Funds
Pension Funds
3.6%
7.6%
19.9%
Percent of Total Assets
Chart 22
Chart 14: Growth of Institutional Investor Interest
in Hedge Funds by Segment
“ The advent of sovereign wealth funds into the space has
been the only really new entrant,”
– Institutional Fund of Funds
“ When I arrived we had one pension and now we have money
from 100. We had zero money from sovereign wealth funds
and now we have money from 5,”
– >$10 Billion AUM Hedge Fund
“ Endowments are more fully invested. We haven’t really seen
any who aren’t in the hedge fund space,”
– Institutional Fund of Funds
“ We can’t talk about investors like “an” investor. Endowments
are very different than corporate pensions. Public pensions
are very different from family offices. Are there some
that act like the other? Sure, but they’re just different
organizations that make decisions differently and that
influences how they allocate,”
– >$10 Billion AUM Hedge Fund
Source: Citi Prime Finance Analysis