Asset Owners Scale Up Hedge Fund Pools

Despite the headlines, asset owners have boosted hedge fund allocations more than they’ve cut back.

More institutions—40—grew their hedge funds portfolios above $1 billion than cut or reduced them over the last 12 months, despite major exits such as the New York City Employees’ Retirement System.

“These investors are the cornerstone of the asset class and a potential mass exit could indicate worrying times for the industry.”Large-scale asset owners grew by a net $28 billion in the year to the end of June, according to Preqin. This was despite 29 asset owners reducing or removing their hedge fund allocations in the same period.

Both public- and private-sector investors in the US have hiked allocations, including the Mars Pension Fund (to $1.1 billion, or 24% of the portfolio), the University of California (up by $1.2 billion), and the State of Wisconsin Investment Board (up by $1.2 billion), Preqin said.

“These institutions”—the so-called $1 billion club—“have significant resources, not only in terms of assets but also in regards to human capital,” Preqin’s report stated. “With such large allocations to hedge funds, the $1 billion club investors often employ dedicated individuals and teams focusing on hedge fund investment in order to build and oversee hedge fund portfolios.”

These asset owners are more likely than those outside the club to move away from funds-of-funds, Preqin said, given their “sophistication and expertise.”

The 238 investors in the $1 billion club make up less than 5% of all those covered by Preqin’s database of hedge fund allocators, but they control almost a quarter of the capital.

“With this in mind, it is understandable why the actions of some high-profile institutions withdrawing capital from hedge funds may draw headlines,” the report concluded. “These investors are the cornerstone of the asset class and a potential mass exit could indicate worrying times for the industry.”

However, Preqin argued that recent signs were positive: “There are more members of this exclusive club than ever before and their exposure to hedge funds has grown collectively by nearly $30 billion over the past 12 months. With big ticket sizes and the continued support of the hedge fund industry, the $1 billion club is likely to remain important, influential and active in the asset class for some time.”

Read Preqin’s $1 Billion Club report in full: “The Largest Investors in Hedge Funds.”

Related: Public Pensions Still Hungry for Hedge Funds & Asset Owners Firing Funds-of-Funds—And Hiring Their Talent

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