Institutional investors will raise the amount of capital they place with hedge funds in coming years as they increasingly see the funds as ‘shock absorbers’ to insure against losses, and not simply as a tool for diversification, according to a report by Citigroup.
Institutional investments in hedge funds will rise to $2.31 tn by 2017, or 5.3 percent of total global assets held by institutional investors, up from $1.49 tn (4.2 percent of global assets) as of the end of 2012, the report says. That means the share of hedge funds’ assets under management coming from institutional investors will rise to 71 percent in 2017 from 66 percent last year.
‘Institutional investors have become the predominant audience for hedge fund investing over the past decade,’ the report notes. ‘Their view on where hedge funds fit into their portfolio, and their investment goals for their hedge fund allocations, have both undergone significant changes over the years, with market leaders moving from capital-based allocations that place hedge funds in the satellite of their portfolio to risk-aligned considerations that move hedge funds into their core equity and bond holdings.’
For the 2013 Citi Prime Finance annual report on the hedge fund industry, Citigroup analysts conducted in-depth interviews with 82 market leaders representing $5.6 tn in overall assets under management, with $336 bn of that allocated to hedge funds.
The study also finds that institutional assets allocated to hedge funds have grown steadily from $878 bn in 2008 to the current $1.49 tn, while the share of hedge fund assets rose from 47 percent in 2008 to the current 66 percent. The report adds that, as interest in hedge funds from institutional investors has grown, interest from high-net-worth individuals and other investors has remained flat, giving institutional investors greater importance in the sector.
Citi says hedge fund managers have started to more readily share information about their portfolios with investors since the global financial collapse, in part due to increased pressure for transparency and accountability.
‘As investors have gained more insight into hedge fund holdings, they can get a more holistic view on how these positions compare with positions held elsewhere in their portfolio, and thus have been able to better evaluate how their hedge fund holdings interact with their long-only exposures,’ the report says.
Institutional investors are also more likely to boost allocations to hedge funds in the future as risks to their portfolios and market volatility are likely to increase, according to the report authors.
