Institutions Using More Hedge Funds Since Lehman Crash

The fifth anniversary of Lehman is now upon us, as are memories of financial weapons of mass destruction, TARP, quantitative easing and other still-lingering reminders of that event. Therefore, the vast majority of the investing public probably doesn’t view hedge funds at tools to reduce risk, yet that is an intended purpose.

It’s something institutions realize, and are increasingly looking to hedge funds for risk management and diversification, according to new research from Boston-based research firm Cerulli Associates.

“Our research shows that institutional investors overall have been steadily increasing the portion of their assets allocated to hedge funds over the past five years,” Michele Giuditta, associate director at Cerulli, said in a statement. “Endowment funds, family offices and foundations were early adopters and currently remain established investors.”

Noting that institutional investors have been under “significant pressure” since 2008 to increase their portfolio returns without inflating their risk profiles, Giuditta notes, “[It’s] a tall order, and it has led many institutional managers toward a renewed interest in developing hedge fund products.”

Pension investors, in particular, are responsible for the largest portion (55%) of institutional investor assets invested in hedge funds, he adds. Nonetheless, institutional investors overall have been steadily increasing the portion of their assets allocated to hedge funds during the past five years.

For instance, endowment funds, family offices, and foundations were early adopters and currently remain established investors. Endowments’ allocations to hedge funds have held stable at close to 19% during the past five years. For endowment funds, their relative flexibility with respect to illiquidity and lockup periods can sometimes be an advantage in terms of hedge fund investing, the firm claims.