Going Direct: Worth It for $200M+ Portfolios

(July 9, 2013) – Institutions with hedge fund portfolios totaling $200 million or more are better off cutting out the middle men, researchers have found.    

Institutions investing directly into hedge funds gained on average an additional 2.6% per year over their counterparts who preferred funds-of-funds, according to authors Vikas Agarwal of Georgia State University, Vikram Nanda of the Georgia Institute of Technology, and the University of Florida’s Sugata Ray.

Preqin data from 2010 provided the researchers with a snapshot of institutions’ hedge fund portfolios, from which they based their analysis. Larger institutional investors were more likely to go direct rather than through intermediaries, and likewise more likely to obtain better returns, the finance researchers found.   

These major asset owners, including pension funds, university endowments, and foundations, have been lured to invest in hedge funds in the recent years by the promise of alpha.

The study found that a greater proportion of university endowments and foundations skipped over funds-of-funds, whereas pension funds—both public and corporate—relied on intermediary investors more often.

Larger institutions also enjoyed economies of scale-to a point. Agarwal, Nanda, and Ray determined that marginal returns began to diminish when funds’ total assets under management hit roughly $8.1 billion.

The researchers used Preqin data covering the hedge fund investments of 336 endowments, foundations, and pensions funds. Read their entire paper—“Institutional Investment and Intermediation in the Hedge Fund Industry”—here.