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Institutional Investment in Hedge Funds: Evolving Investor Portfolio Construction Drives Product Convergence
As Chart 21 details, based on the 5-year growth rates noted
between 2006 and 2011, the total institutional allocation to
alternatives could rise from 25% of total assets in 2011 to
28% in 2016, and the allocation to hedge funds from these
participants could rise from 4.5% to 5.9%. From a dollar-
value perspective, this would equate to a jump in hedge fund
industry AUM from $1.47 trillion in 2011 to $2.47 trillion by
2016, as detailed in Chart 21.
One of the key questions to consider in this scenario is
whether these rising allocations will be targeted at today’s
traditional hedge fund industry participants or whether an
emerging class of hedge fund-like strategies and offerings
from traditional asset management firms will instead be able
to attract an increased share of these assets. Conversely,
there are growing signs that hedge funds themselves are
cutting into long-only allocations and that they are looking
to compete to manage a share of traditional institutional
investor assets.
Having explored changes in investor portfolios and how their
interest may evolve, we will now turn our analysis toward
the investment management community, where there is a
tremendous amount of product innovation occurring that
is narrowing the gap between hedge funds and traditional
asset managers.
“ We expect to see more allocations from corporate and public
pensions and they will account for a greater percentage of
our AUM,”
- $1-$5 Billion AUM Hedge Fund
“ Sovereign wealth funds are at vastly different stages. Some
are young and naïve and they have unrealistic expectations
about performance. They are targeting 20% across their
entire portfolio. That’s one extreme, and then you have
other more established funds targeting 6% across the
portfolio,”
- $1-$5 Billion AUM Hedge Fund
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% 18% 20% 25% 30% 39% 53% 55% 15% 18% 21%
Alternative Asset
$3,253 $4,402 $5,862
$575
$1,199
$2,398
$166
$355
$581
$3,994
$5,955
$8,842
Hedge Fund as % of
Alternatives
21% 22% 23% 25% 30% 35% 53% 37% 40% 23% 25% 28%
Hedge Funds Assets
$683
$977
$1,398
$145
$364
$839
$89
$133
$233
$917
$1,474
$2,470
Hedge Fund as % of
Total Assets
2.9% 3.6% 4.3% 5.0% 7.6% 10.5% 20.9% 19.9% 22.0% 3.5% 4.5% 5.9%
Chart 21: Scenario II: Projected Institutional Hedge Fund Assets by 2016 – Rising Share of Alternatives
(Billions of Dollars)
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