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Institutional Investment in Hedge Funds: Evolving Investor Portfolio Construction Drives Product Convergence
I
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Starting with pension funds, we forecast that the total
allocation to alternatives will rise from 16% to 18% of total
assets, in line with the gain from 14% to 16% noted between
2006 and 2011. Similarly, we project that the share of those
alternatives being targeted at hedge funds increases 1%, from
22% to 23%. The result of this analysis shows potential for
pension fund allocations to hedge funds to jump from $977
billion to $1.4 trillion, rising from 3.6% to 4.3% of total pension
fund assets.
For sovereign wealth funds, we project a 5% increase in
allocations to alternatives, from 25% to 30% of total assets,
and within that alternative category we see interest in hedge
funds also rising 5% ,from 30% to 35% of total alternatives.
The result is a large jump in hedge fund interest from $364
billion to $839 billion, rising from 7.6% to 10.5% of total
sovereign wealth fund holdings.
These figures seem to be in line with this segment’s likely
growth, as the profile of sovereign wealth funds is seen as
being located somewhere between conservative pension
funds and aggressive E and Fs. Survey participants noted that
younger sovereign wealth funds are more returns-focused
with higher returns targets while more established funds
present a more conservative pension fund-like profile.
Because E and Fs allocations have already begun to retreat,
we had to estimate interest in this scenario. As noted
earlier, smaller organizations in this segment are increasing
their alternative and hedge fund allocations, even as larger
organizations are slowing their allocations. Since these
smaller participants do not carry as much influence on a dollar-
weighted basis, we have forecast only a modest increase in the
allocation to both alternatives and hedge funds rather than
use the changes noted between 2006 and 2011. The result is
that we see continued growth in hedge fund interest; however,
from a total assets perspective, the impact of that growth is
only likely to raise hedge fund allocations from 20% to 22%
of total endowment and foundation holdings.
0
2006
2011
2016 Estimate
Chart 28
$500
$1,000
$1,500
$2,000
$2,500
$683
74%
$977
66%
$1,398
8
57%
$364
25%
$839
34%
$89
10%
$133
9%
$233
9%
$917B
$1,474B
$2,470B
$145
16%
+ $996B
Pension Funds
SWFs
E&Fs
Billions of Dollars
Chart 20: Scenario II: Breakdown of Institutional
Assets by 2016
Source: Citi Prime Finance Analysis based on Towers Watson,
SWF Institutte, OECD, NACUBO Commonfund & eVestment HFN data