Basic HTML Version
30
I
Institutional Investment in Hedge Funds: Evolving Investor Portfolio Construction Drives Product Convergence
Pension Funds
Sovereign Wealth
Funds
Endowments &
Foundations
Total
2006 2011
2016E 2006 2011
2016E 2006 2011
2016E 2006
2011
2016E
Total Assets
$23,237 $27,510 $32,568 $2,875
$4,794
$7,994
$425
$670
$1,057
$26,537
$32,974
$41,619
Alternative as % of
Total Assets
14% 16% 14% 20% 25% 20% 39% 53% 39% 15% 18% 16%
Alternative Asset
$3,253 $4,402 $4,560
$575
$1,199
$1,599
$166
$355
$412
$3,994
$5,955
$6,571
Hedge Fund as % of
Alternatives
21% 22% 21% 25% 30% 25% 53% 37% 37% 23% 25% 23%
Hedge Funds Assets
$683
$977
$958
$145
$364
$400
$89
$133
$153
$917
$1,474
$1,511
Hedge Fund as %
of Total Assets
2.9% 3.6% 2.9% 5.0% 7.6% 5.0% 20.9% 19.9% 14.5% 3.5% 4.5% 3.6%
Using those levels as a guide, we have estimated that pension
funds’ total allocation to alternatives rose from $3.25 trillion
in 2006 to $4.40 trillion in 2011. We also have estimated that
the share of alternatives targeted at hedge funds increased
from 21% to 22% of alternatives. This implies that pension
allocations to hedge funds rose from $683 billion in 2006 to
$977 billion in 2011, equating to a jump from 2.9% to 3.6% of
total global assets.
In the sovereign wealth fund space, there is a less precise
breakdown of how assets are allocated, but various industry
publications andour own set of interviews have ledus tobelieve
that in 2006, these participants collectively had targeted
20% of their total allocations to alternatives and that by 2011,
that figure had increased to 25%. Within their alternatives
category, we see hedge funds having risen from 25% to 30%
of the allocation. The results of these calculations show an
estimate on sovereign wealth fund allocations to hedge funds
of $145 billion in 2006 and a jump in that figure to $364 billion
by 2011.
Finally, figures provided by NACUBO give us a good guideline
to follow in estimating E and Fs allocations to hedge funds.
Between 2006 and 2011, these organizations dramatically
increased their alternatives allocation from 39% to 53%
of total assets, but in part this represented a denominator
effect due to sharp losses in the portfolio in 2010. Within the
alternatives category, there was a decrease in the allocation
to hedge funds as discussed in the section above, but this was
partially offset by growth in the overall alternatives bucket.
Our estimate for this segment is that hedge fund allocations
rose from $89 billion to $133 billion between 2006 and 2011.
The reason we have broken out these changes so precisely is
to provide the foundation for a forecast of what might happen
to the hedge fund market if interest from institutions stalls.
Chart 18 shows the result of that projection. Because trends
within the alternatives and hedge fund space do not impact
the overall size of assets, we have used the average rate of
growth between 2006 and 2011 and come up with a forecast
on the size of the total global pool of institutional assets,
showing that these holdings will increase from $33.0 trillion
to $41.6 trillion by 2016.
Within each category, we then took down the share of capital
being allocated to alternatives back to the levels last seen
in 2006. We also reduced the share of alternatives being
Estimated Breakdown of Institutional Assets: 2006, 2011 & 2016 Estimate
Based on Continued Growth in Alternate & Hedge Fund Interest Millions of Dollars
Assumptions:
1. Entire Alternatives allocation of global pension fund assets is held by institutional investors
2. Alternatives percent of global pension funds based on top 7 nations share of global assets
(97% 2006/89% 2011)
3. Sovereign Wealth Fund allocation to Alternatives & Hedge Funds estimated based on Citi Prime
Finance interviews & OECD, SWF Institute Data
4. US & Canadian Endowments & Foundations estimated at 80% of global E&F
5. E&F share of Alternatives & Hedge Funds based on NACUBO Endowment Study US/Canadian
Estimates
6. 2016 total assets based on average rate of growth by category from 2006 to 2011
Chart 18: Projected Breakdown of Institutional Assets by 2016 Based on Declining Alternative
& Hedge Fund Interest (Billions of Dollars)
“ The target we set for our hedge funds influence our
allocation. Precrisis, we had 15-16% of the portfolio in hedge
funds. Post-crisis we’ve taken that down to 10%-11%,”
– European Public Pension
“ Last year, the equity markets collapsed in the summer and
the equity long/short funds had a high correlation with the
equity markets and we began then to reconsider our equity
long/short allocation,”
– Asian Corporate Pension