Asset AllocationJune 3, 2015

Private Pensions Join Hedge Fund High Rollers

Public pensions still hold the most capital in hedge funds, but they are being chased down by their private peers.

Reported by Featured Author

Private pension funds were the keenest to allocate to hedge funds over the past 12 months, accounting for almost a third of the new investors to enter Preqin’s $1 Billion Club.

“The appetite for major investment in hedge funds remains strong, and appetite shows no signs of abating.” —Amy Bensted, PreqinThe data provider, which monitors institutional investors with $1 billion or more of their assets in hedge funds, found the vast majority of these private pensions were based in North America. The 51 new members across all investor groups took the total membership up to 227.

“The past 12 months have seen mediocre performance generated by the industry as a whole and a handful of high-profile pension funds publically announced their intention to scale back their hedge fund allocations,” Preqin’s report said. “Nevertheless, assets under management across the industry increased during this period and inflows from institutional investors continue to pour in.”

Foundations made up the next largest proportion of new investors to the asset class, with 16% of the group.

Despite announcements from large public pensions that they were taking their money from the sector, still 25% of investor capital held by those in the $1 Billion Club was allocated from this group. This is the largest holding and significantly more than sovereign wealth funds, which sat in second place with 16% of capital in the club allocated from them.

However, European investors may have fallen out of love with the sector over the past year to the end of May, Preqin found. From a 28% proportion of capital allocated to the club by this region’s investors in a year earlier, just 21% can be attributed to them in the latest survey.

This represented a $30 billion decrease in the capital allocations to hedge funds made by Europe-based $1 Billion Club members.

Regulations, such as Solvency II, have made investing in the sector more costly for European insurance investors, Preqin said. And although the regulation does not come into effect until 2016, Norwegian insurer Storebrand pulled out of hedge funds entirely in the second quarter of 2014.

For those remaining with the sector, the average $1 Billion Club member allocated 15.9% of their assets to hedge funds. Investors outside the club allocated an average 14.3%, Preqin said.

Members are targeting macro funds, the data showed, with 48% of investors looking to allocate to the strategy in the next 12 months. Long/short equity was favoured by 39% of club members.

“The rise in the number of $1 Billion Club members over the past few years shows that the appetite for major investment in hedge funds remains strong, and appetite shows no signs of abating,” said Amy Bensted, head of hedge fund products, Preqin.