Smaller hedge funds suffer in insto-driven market

Smaller hedge fund managers, which may well include some of the best performers, are struggling for inflows due to the institutionalisation of the hedge fund industry, new research from Preqin indicates.

A survey of 60 hedge fund managers by global alternatives research firm Preqin shows that the proportion of hedge fund manager assets sourced from the institutional market, such as pension funds, has risen from 45 per cent in 2008 to 61 per cent in January this year.

The good news for investors is that this trend has been accompanied by increased use of risk management procedures, lower fees and increased transparency from the managers.

However, smaller managers – which often perform best in capacity-constrained strategies in particular – are struggling to attract their fair share of the increased institutional flows.

Preqin estimates that from its database of 2,500 institutional investors in hedge funds, the average minimum requirement for a manager’s assets under management to be investable is around $320 million. The survey results show that managers with less than $250 million get only 45 per cent of their money from institutions, whereas managers in the next category, $250-499 million, get 59 per cent. The largest managers, with more than $10 billion under management, get 67 per cent of their funds from institutional investors.

The Preqin report says: “Moving from an asset class predominated by wealthy individuals and family offices to an institutionally focused industry has fundamentally changed the hedge fund market.

Sponsored Content

“Nearly half of the respondents – 46 per cent – stated that having more institutional investors in their funds has resulted in the firm putting more risk-management procedures in place. Institutional investors have to take into account their responsibilities to meet funding needs, as well as fulfilling regulatory procedures put in place by boards of trustees or wider legislature within their jurisdictions.”

Almost as many respondents – 42 per cent – also said that an increasingly institutional client base has led to a reduction in fees.

“Recent Preqin research has revealed that investors are just now beginning to feel that the fees charged by hedge fund managers have reached a level which is mutually acceptable to both fund manage and institutional client.”

About one-in-five managers has also introduced alternative investment structures, such as UCITS-registered funds in Europe and managed accounts or discretely managed mandates.

Leave a Comment

Sort content by

The cost of bad asset allocation

A study of 300 US pension funds by CEM Benchmarking reinforces the importance of asset allocation, highlighting the performance of asset classes, as well as new evidence on correlations between asset classes. Alex Beath, author of the study, discusses the implications for asset allocation with Amanda White. A CEM Benchmarking study “Asset Allocation and Fund

The OECD’s plan for long-term investment

G20 financial ministers and central bank governors welcomed the findings of the G20/OECD roundtable on institutional investors and long-term investment last month, which included clear plans to incentivise institutional investors to undertake more long-term investments. The roundtable, “From solutions to actions: implementing measures to encourage institutional long-term investment financing”, held in Singapore recognised that long-term

Why long-horizon investors should adopt factor-based asset allocation

Long-horizon investors can withstand macro-economic volatility and so should tilt towards strategies that are exposed to that, including value, small cap and momentum. Oleg Ruban, vice president in the applied research team at MSCI says this validates factor-investing and factor-based asset allocation for these investors.   Appropriate asset allocation requires explicit attention be paid to

The case for long-termism

Keith Ambachtsheer’s lead article in the Fall 2014 edition of the Rotman International Journal of Pension Management, takes readers through an historical and logical journey that supports the case for long-termism. Importantly he validates this with four high-profile investor case studies which demonstrate that a long-term view benefits society but also the investors, willing to

Investors alter allocations because of climate risks

A number of large institutional investors, including AP1, the Environment Agency and AustralianSuper, made changes to their strategic asset allocation as a result of Mercer’s 2011 study on climate risks, and now the consultant is working with a new raft of investors to assess forward-looking climate change scenarios against their current allocations. Meanwhile one of

Real estate sector continues to lead on sustainability: GRESB

This year’s Global Real Estate Sustainability Benchmark (GRESB) reveals that sustainability reporting has improved in coverage and quality of data, with the average overall score increasing due to increasing implementation and measurement. The average score is now 47 (out of 100) which is up nine points this year. The benchmark collects data from 637 listed

Previous