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Institutional Investment in Hedge Funds: Evolving Investor Portfolio Construction Drives Product Convergence
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Industry AUM May Be Near Peak if Institutional
Interest Stalls
In an attempt to quantify how slowing interest in alternatives
and hedge funds may impact overall AUM, we dug into the
pattern of industry change over the past 5 years. One key point
to note is that even with the dramatic events of 2008-2009,
our estimates show that the overall level of global institutional
assets grew 24.5%, from an estimated $26.5 trillion to $33.0
trillion between 2006 and 2011. Gains in overall assets were
evident from each major institutional audience, as shown in
Chart 17.
According to Towers Watson, pension funds that represent
the vast majority of institutional capital increased their
global holdings from $23.2 trillion to $27.5 trillion in this
5-year window. Sovereign wealth fund capital increased
from $2.9 trillion to $4.8 trillion based on figures emerging
from both the Organisation for Economic Co-operation and
Development (OECD) and the Sovereign Wealth Fund (SWF)
Institute. Finally, according to NACUBO, the total amount of
assets held by US and Canadian endowments and foundations
grew from $340 billion to $546 billion and since our estimate
is that these institutions represent approximately 80% of
the global endowment and foundation market, we see overall
endowment and foundation capital having increased from
$425 billion to $670 billion.
The share of that capital being targeted for alternatives also
rose across each of these audience segments, as also shown
in Chart 17.
Within the pension space, detailed asset allocations are
provided by Towers Watson for the top seven nations—
the United States, the United Kingdom, Switzerland, the
Netherlands, Japan, Canada, and Australia. These countries
represented 97% of global pension assets in 2006 and 89%
of assets in 2011. Their allocation to alternatives rose from
14% to 16% of total capital in that period.
10%
12%
14%
16%
18%
20%
22%
24%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Over $1B
in Assets
All Institutions
17.8%
24.4%
21.8%
20.4%
19.9%
Chart 24
11.3%
Chart 16: U.S. & Canadian Endowments &
Foundations’ Allocation to Hedge Funds
“ Endowments and foundations have been shrinking since the
financial crisis and they are well down from being 1/3 of our
asset base,”
– Asset Manager With Hedge Fund Product
“ Future flows from the pension space are really going to
be returns dependent. If people don’t get the hedge fund
return they expect, there may not be much growth in the
industry from here. There are a lot of plans thinking about
taking that initial step into hedge funds, but the last couple
years have dampened their enthusiasm,”
– Institutional Fund of Fund
Source: Citi Prime Finance Analysis from NACUBO
Commonfund Endowment Study 2002-2011
Chart 25
Alternative Assets
Total Assets
Hedge Fund Assets
Global
Pension Funds
Sovereign
Wealth Funds
Endowments &
Foundations
Total
Institutional
18%
35%
43%
67%
108%
151%
58%
114%
50%
24%
49%
61%
0% 20% 40% 60% 80% 100% 120% 140% 160%
Source: Citi Prime Finance Analysis based on Towers Watson, SWF Institutte,
OECD, NACUBO Commonfund & eVestment HFN data
Chart 17: Growth in Various Institutional
Assets By Type: 2006 to 2011