Institutional Limited Partners Set to Increase Hedge Fund Allocations

(May 22, 2011) – Ninety-four percent of institutional investors who currently use hedge funds are likely to increase their commitment over the next three years, recent research shows.

According to London-based research firm Preqin, only 7% of institutional investors polled – all of whom currently allocate to hedge funds – have no plans to increase their exposure in the coming years. Thirty percent say they will definitely invest more capital in that timeframe, while 64% say they are considering it.

As for what hedge fund vehicle they are allocating to, the survey shows a general shift toward a direct approach, as opposed to a fund-of-funds one. Thirty-two percent of funds who use fund-of-funds will start to invest directly in the next three years, according to Preqin, while an additional 8% will consider doing so.

The survey also shows a commitment to internal hedge fund resources. According to the firm, 40% of respondents have a hedge fund-specific investment officer on staff, and 50% of this group employs strategy-specific researchers, as opposed to generalists. Twenty percent of investors have expanded their hedge fund teams in the past 12 months; 20% of those who don’t have internal hedge fund teams plan to develop them within the next three years.

This increase in hedge fund-related resources is echoed in other parts of institutional investing organizations. According to the survey, 39% of investors have increased the size of their general investment teams in the past three years, while 72% of those that have done so have executed the move in the past year. Only 2% of respondents reported a fall in the size of their general investment team in the past three years, and no investors have decreased the size of their hedge fund-specific team in the same period.