Institutional Investors Flock to Hedge Funds

A new report from Preqin has revealed that institutional investors constitute the largest piece of the hedge fund capital pie.

(February 10, 2011) — Institutional investors have revolutionized the hedge fund industry, according to Preqin’s latest study of 60 hedge fund managers from Asia, US, Europe, and other parts of the globe.

“The consensus is clear: hedge fund managers are witnessing large inflows of capital from institutional investors, and are adapting their fund strategies and marketing accordingly,” said Amy Bensted, Preqin’s manager of hedge fund data, in a statement. “Smaller funds continue to find it more difficult to attract institutional investors, as many do not have sufficient assets under management to be a viable investment option for some of these investors. However, most fund managers are expecting more money from institutional coffers over 2011 and into 2012, suggesting that the proportion of institutional capital in the sector is due to grow even more over the next 18 months.”

In Preqin’s latest study, 61% of hedge fund capital now comes from institutional investors as managers adapt to changing demands. By comparison, institutional capital represented about 45% of the assets in the industry in 2008. According to the findings, hedge fund managers are altering their fees, adjustment procedures and strategic offerings to attract institutional investors to their hedge funds.

Further details from the study:

  • 46% of managers have put more risk management procedures in place as a result of having more institutional investors in their funds.
  • 42% have reduced the fees charged on funds.
  • 21% have introduced alternatives to commingled funds to attract or maintain institutional interest.
  • 57% of respondents stated that over half of their assets come from the institutional sector • 47% of managers have seen an increase in institutional capital over the past three years, increasing to 56% over five years.
  • Almost half of those surveyed plan to market specifically to the institutional sector in the coming 12 months.
  • 15% expect to launch UCITS-structured hedge funds; institutional investors are increasingly keen to take advantage of the transparency and liquidity requirements of these fund structures.

Further research into hedge funds in 2011 come from Agecroft Partners, a consulting and third-party marketing firm, which predicted that inflows into hedge funds will cross various strategies/categories, and will increase in amount from all types of institutional investors. These flows will be focused on small and medium-sized hedge funds, according to the firm, due in part to a decrease in competition from larger funds that have closed their doors to new investors.

“In 2009 and 2010, there was a significant increase in competition within the hedge fund industry due to many previously closed hedge funds opening their funds to new assets,” the firm said in a press release. “After two years of the majority of assets flowing to the largest hedge funds, combined with strong performance, many of these big funds have either closed or are near capacity. The end result is less competition for assets from the largest well-known hedge funds as investors shift their focus away from investing in brand names toward managers capable of generating future alpha.”

Also included in Agrecroft’s predictions: 2011 will bring a large number of hedge fund launches, as was seen in the growth years before 2008’s crisis.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href=''></a>; 646-308-2742