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Institutional Investment in Hedge Funds: Evolving Investor Portfolio Construction Drives Product Convergence
Chart 32: Global Pension Fund Assets—Focus on
Equities & Bonds Held in Individual Accounts
2016 total assets based on average growth between 2006 & 2011.
Breakdown of assets reflects projection for continued growth in
institutional interest in both Alternatives & Hedge Funds
Source: Citi Prime Finance Analysis based on Towers Watson
Global Pension Studies & eVestment HFN data.
0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
2006
2011
2016 Est.
$3,253
$4,402
$5,862
Alternatives
$10,574
$12,523
$14,301
Institutional
Equities
&Bonds
Individual
Equities &
Bonds
$9,410
$10,586
$12.405
10% $1.24T
Chart 40
According to SEI, there were 1,500 alternative UCITS funds
and 750 alternative mutual funds & ETFs as of August 2011.
These numbers can, however, be somewhat misleading.
Assets were highly concentrated, with only 41 UCITS funds
and 28 mutual funds/ETFs running more than $1 billion AUM.
Moreover, these offerings only accounted for 4.4% of the total
UCITS and US mutual funds/ETF market. While this is up from
2.2% in 2007, it is still only a tiny portion of overall assets.
Survey respondents for the most part saw these products as
offering substantial potential for growth. SEI and Strategic
Insight project that assets are likely to hit the $1 trillion
AUM mark by 2014. This would represent a 50% expansion
in industry AUM. Many participants felt, however, that the
opportunity will be primarily realized through subadvised
products that can be distributed directly to retail clientele
or as targeted vehicles for institutional participants facing
specific liquidity constraints.
They also noted several potential pitfalls with these structures.
Several respondents noted that these products were only
suitable for strategies using highly liquid products.
There were also concerns that these products would not get
the same attention and focus from hedge fund managers
as their core funds, since the fee potential was not as great.
Many worried that managers would just view these products
as an opportunity for asset gathering and that their lack
of performance could hurt the brand of the hedge fund
industry overall.
Retail Focused Long-Only Funds Offer the Largest
Asset Opportunity
Hedge fund managers have not traditionally focused on the
long-only retail audience because in many markets, including
the US they were prohibited from charging an incentive
fee to these participants. There are also sometimes rules
prohibiting or limiting the use of leverage or shorting for
these inexperienced investors. Attitudes about this audience
began to change noticeably after the Global Financial Crisis,
however, as many hedge fund managers lost substantial
portions of their AUM or were finding it difficult to attract
flows for their traditional hedge fund product.
Several high-profile hedge funds launched regulated, pooled
long-only mutual funds or open ended funds in the period
since 2009. These pioneers have raised billions of dollars
in these vehicles. Many of these managers see the addition
of this audience base as adding resiliency to their portfolio.
They also cite a strong demand from these investors, as
disappointing equity markets and falling pension or retirement
fund balances have prompted these investors to seek out
more active management. Concerns about regulation hurting
interest in hedge fund products, particularly in Europe, is
another factor. Finally, there is a sense that the size of the
AUM pool is sufficiently large for retail-focused, long-only
funds that a hedge fund manager will still be able to realize
substantial profits by offering these funds, even with fees as
low as 50 basis points.
In Chart 32, we explore that contention, looking at just those
funds that may be available from individual investors via their
pension fund or retirement fund holdings. As we noted back
in Section III, Towers Watson estimated that the global pension
market in 2012 was $27.5 trillion, up from $23.2 trillion in 2006.
Based on the average rate of growth in assets, we had also
forecast that the total would rise to $32.6 billion by 2016.