Institutional Investors Flock to Hedge Funds

(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:

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

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='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

As part of its pursuit toward assets with long-term income streams, the Canada Pension Plan fund is boosting its real estate and infrastructure holdings.

(February 10, 2011) — The head of one of Canada’s most active global investors has revealed that it is eyeing US commercial property.

David Denison, chief executive of the Canada Pension Plan Investment Board (CPPIB), which oversees $140 billion in assets for Canada’s national pension plan, told the Wall Street Journal that he has witnessed a spike in the availability of commercial real estate in the US, and that he is expecting that trend to continue.

Largely due to a number of major purchases in recent months, the fund reported its infrastructure holdings have ballooned over the past nine months to become 6.8% of the fund’s total assets with a total value of $9.5 billion, up from 4.6% of assets worth $5.8 billion as of last March 31. Meanwhile, real estate assets have grown to $9.2-billion in value representing 6.6% of the fund’s holdings, an increase from $7 billion or 5.5% of total assets last year.

The CPPIB is one of the country’s most active investors. In September, Onex, Canada’s largest private-equity firm, and the CPPIB announced that they completed the acquisition of Tomkins, a UK-based manufacturer serving the general industrial, automotive and construction markets around the globe. The total value of the deal came to $5 billion — including equity and debt — making it the largest private-equity deal of the year. The deal surpassed Blackstone’s $4.8 billion acquisition of Dynegy, announced in August. The fund additionally spent $3.4-billion to buy privately owned Intoll Group of Australia, which held a 30% stake in the 407 toll highway north of Toronto. CPPIB also bought a further 10% stake in 407 highway from Spain’s Cintra Infraestructuras S.A., giving the CPPIB a 40% interest in the toll road.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

“Consistent with our investment thesis for our proposed acquisition of Intoll Group, we believe 407 ETR is an attractive infrastructure asset and is a strategic fit with CPPIB’s portfolio and long-term investment mandate,” said André Bourbonnais, senior vice-president of private investments at CPPIB in a statement. “As an essential toll road in the Greater Toronto area, Highway 407 ETR is situated strategically to ease traffic congestion and to benefit from future urban growth in Toronto.”

Fueled by an increase in global stock markets, according to the CPPIB, the fund reported a 3% return on its assets — an increase of 1% from the previous quarter. “It’s very much strategic. We think infrastructure assets and real estate assets make compelling good sense for a long-horizon fund such as the CPP and we’ve been acquiring assets on a disciplined basis over the past four or five years in each category,” Denison said, according to the Globe and Mail.

The Alberta Investment Management Corporation (AIMCo), the corporation created to manage Alberta’s pension and sovereign wealth capital, has also embraced infrastructure, mirroring the move by other big pension funds to invest directly in infrastructure assets as opposed to relying on third-party funds. Earlier last month, in an effort to locate stable long-term investment vehicles with decent yields, the fund manager agreed to buy a 50% stake in Autopista Central, a motorway in Santiago, Chile. AimCo’s de Bever, often regarded as the king of infrastructure investment, told the Financial Times that such deals made sense because some infrastructure funds still carry 2-and-20 style performance fees (2% of assets and 20% of profits), noting that pensions have thus moved away from investing through third-party investing vehicles largely because of the fees involved.

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