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Billion-Dollar Hedge Fund Investors Staying the Course

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Several high-profile institutional investors have cut hedge funds from their portfolios over the past two years, raising the question of whether a mass exit from the sector is underway.

No, says alternatives data provider Preqin in its latest report on institutional investors that have committed more than $1 billion to hedge funds.

Indeed, the $1 billion club has grown by a net 11 participants over the past year, despite a defection by the $51 billion New York City Employees’ Retirement System in April, Preqin’s research showed.

In 2014, California Public Employees’ Retirement System, the nation’s biggest public pension fund, slashed its allocation to hedge funds.

In its new report, Preqin said 40 institutions had joined the $1 billion club, while 29 had fallen out of the group after reducing their exposure to the hedge fund industry.

Private- and public-sector pension funds together represent just under half of new entrants to the club.

According to the report, the combined sum of capital invested by the $1 billion club rose from $735 billion as of May 2015 to $763 billion a year later, a 4% increase.

Although investors in this elite group account for just 5% of all active hedge fund investors, they represent 24% of the total $3.1 trillion in assets under management held by the industry.

“Despite the small number of participants in the hedge fund investor $1 billion club, they are mighty in influence and represent nearly a quarter of all capital at work in the industry,” Preqin’s head of hedge fund products, Amy Bested, said in a statement.

“As such, it is understandable why the redemptions of high-profile institutions such as NYCERS in 2016 and CalPERS in 2014 may attract headlines; these investors are the cornerstone of the asset class and a potential mass exit could herald worrying times for hedge funds.”

Bensted said the outlook for 2016 remained positive. “With large resources and the continued support of the hedge fund industry, the $1 billion club is likely to remain influential and active.”

Other Findings

Public pension funds represent 27% of the total capital of billion-dollar investors. As of May, these investors had $208 billion allocated to the industry, up from $190 billion 12 months ago.

Despite this increase in capital investment, 49% of public pension funds cut back their allocation to hedge funds in the past 12 months, while 47% increased their exposure.

Preqin said this indicated a division in public pensions’ attitudes to the industry.

Private-sector pension funds account for 16% of billion-dollar club capital. In 2016, these funds increased their investment to $122 billion from $107 billion in 2015, Preqin said.

Boeing Company Pension Fund added $2.4 billion to its hedge fund portfolio over the 12 months to December 2015, and Delta Airlines Pension Fund increased its hedge fund allocation by $1.7 billion, according to Preqin. It said private-sector pension funds accounted for a net growth of five members of the $1 billion club, more than any other type of investor.

Following are the percentage allocations of other investors:

  • Sovereign wealth funds, 16%
  • Endowments, 9%
  • Asset managers, 9%
  • Insurance companies, 9%
  • Foundations, 6%
  • Banks, 3%
  • Wealth managers, 3%
  • Family offices, 2%

North America-based investors account for 62% of capital committed hedge funds by the biggest investors. Europe follows with 23%, and Asia/Pacific and the rest of the world — dominated by Abu Dhabi Investment Authority — with 8% each.

Preqin’s research showed that the biggest investors allocate 16.8% of their AUM on average to hedge funds, compared with the average of 14.8% allocated by all other investors.

Institutions in this group invest in 33 vehicles on average, compared with eight vehicles for smaller investors.

Investors with at least $1 billion invested in hedge funds require an average track record of 3.1 years from a hedge fund, shorter than the average requirement of 3.8 years by all other investors.

However, in order to avoid making outsize investments in a single fund, these investors look for larger funds, requiring managers to have at least $846 million under management on average, compared with the $547 million required by all other investors.

Only 7% of $1 billion club members invest in hedge funds exclusively through funds of funds, compared with 31% of all other investors, Preqin said.

Thanks to their internal resources and expertise, 46% of these investors are able to create portfolios of single funds themselves.

However, 47% continue to use funds of funds to some extent within their portfolios in order to diversify holdings and leverage the expertise that these multi-managers may have in specific areas or sectors, such as emerging managers or emerging markets.

— Check out 4 Ways Impact Investors Are Driving Change  on ThinkAdvisor.


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