2015 Preqin Global Hedge Fund Report

Transcription

1 2015 Preqin Global Hedge Report Sample Pages ISBN: $175 / 95 / 115

2 The 2015 Preqin Global Hedge Report - Sample Pages Know Your Investor The Institutional Investor Universe Over 4,800 institutional investors across the globe are using hedge funds to diversify their portfolios and to add a source of risk-adjusted returns to their holdings (see page 76: Investor Survey to fi nd out more about why investors allocate to hedge funds). Hedge funds are moving from the peripheries of investor portfolios into the mainstream, as a wider group of institutions look to hedge funds to meet their liabilities and to meet wider portfolio expectations. With the introduction of new regulations and the ongoing review of existing ones, as well as a growing understanding of the importance of these funds, institutional investors have gained confi dence in the wealth creation and protection that the asset class can offer. In this section, we examine the hedge fund investor universe by investor type and how this marketplace has grown and evolved in recent years. Figs show breakdowns of the hedge fund investor universe by investor type, including the proportion of all hedge fund capital invested by these investors, the mean maximum lock-up period accepted by them, mean returns expectations, mean allocation to hedge funds, and overall investment approach. s The involvement of public pension funds in the hedge fund industry came under the microscope in the second half of 2014, after a handful of large US schemes, most notably California Public Employees Retirement System (CalPERS), reduced or cut their allocations to the asset class. CalPERS held investments totalling $4.5bn at that time, and at the end of 2013 was the sixth largest US public pension fund in terms of capital allocated to the asset class. Following these high profi le departures from investment in hedge funds, questions were asked about whether this would signal a wider exodus from the asset class by this infl uential group of investors. However, the signs at the moment remain positive; the average allocation of a public pension fund investing in hedge funds has continued to increase over 2014 (Fig. 6.26) and more public pension funds than ever before are using hedge funds in their portfolios. Indeed, public pension funds remain the most signifi cant group of investors which allocate capital to Fig. 6.22: Breakdown of Hedge Investor Universe by Investor Type 2% 12% 19% hedge funds today, representing 2 of all institutional capital invested in the asset class (Fig. 6.23), and of the total number of investors (Fig. 6.22). CalPERS cited the cost and complexity of hedge funds as well as diffi culties in scaling up its program as the reasons behind its departure from the asset class. Other public pension funds have been able to navigate these problems by hiring more internal resource to manage their hedge fund programs, as well as boosting their allocations to of Hedge s Manager Pension Wealth Manager Asset Manager Superannuation Scheme Investment Bank Corporate Investor Other Source: Preqin Hedge Investor Profi les Fig. 6.23: Breakdown of Institutional Investor Capital Invested in Hedge s by Investor Type 7% 6% 3% 3% % Pension Asset Manager Bank Wealth Manager Corporate Investor Superannuation Scheme Other Source: Preqin Hedge Investor Profi les hedge funds over recent years. Today public pension funds on average allocate 7. of their portfolios to investments in the asset class (Fig. 6.26), an increase from Some pension schemes have amassed sizeable portfolios for instance, Maryland State Retirement and Pension System (MSRPS) invests 17% of its total assets under management in hedge funds, which amounts to more than $7.7bn. As well as increasing their allocations to hedge funds, public pension funds have

3 The 2015 Preqin Global Hedge Report - Sample Pages also adjusted their expectations from these investments. On average these schemes target annualized net returns of 5., one of the lowest among all institutional investor groups, down from 6.2% at the end of 2012, and 5.7% in Public pension funds, like other investors which are driven by the need to meet long-term liabilities, are utilizing hedge funds to help reduce portfolio volatility, as well as providing long-term risk-adjusted returns. Public pension funds have increasingly been moving away from investing in hedge funds via fund of hedge funds vehicles in favour of making direct investments. Today, 52% of public pension funds invest via funds of hedge funds only, and 2 invest just in singlemanager funds. This compares to 57% and 17% respectively in Public pension funds are among the most recent joiners to investment in the asset class, with the average public sector scheme making their fi rst investment in As institutional investors become more accustomed to investing in hedge funds, they tend to shift to investing more capital directly than through multimanager vehicles as they build up expertise and comfort levels, and this is certainly evident among public pension funds. Despite this, more public pension funds invest solely through funds of hedge funds (52%) than any other institutional group (Fig. 6.27). of hedge funds managers have responded to the changing needs of their largest clients over recent years by offering new products, customized solutions and access to niche strategies or managers; this refocus on the core business of funds of hedge funds has a strong appeal to public pension funds. Pension s Private sector pension funds represent (Fig. 6.22) of the hedge fund investor universe and 19% (Fig. 6.23) of all the capital invested in the asset class by institutional investors. Private sector pension schemes have been building up their portfolios of hedge funds over recent years, investing on average 10.5% of their total assets under management in hedge funds, an increase from 9.9% in 2013 and 9.3% in 2012 (Fig. 6.26). This increase in the amount they invest, as well as more private sector pension funds making their fi rst allocations over 2014, has narrowed the gap to their public sector counterparts in terms of how much of the total institutional capital invested in hedge funds they represent. In contrast to their public sector peers, private sector pension funds have shown Fig. 6.24: Mean Maximum Lock-Up Period Accepted by Investor Type Mean Maximum Lock-Up Accepted (Months) a move towards more investment in funds of hedge funds in Thirty percent of private sector pension funds have a preference for investing solely via direct funds, a decrease of two percentage points from last year, while 36% now favour investing solely through funds of hedge funds structures, a two percentage point increase from 2013 (Fig. 6.27). Private sector pension schemes will on average only allow their capital to be locked up for 18 months, compared to an endowment plan which would allow a fund to hold its capital for 25 months before redemption. s Despite the secretive nature of much of the world s sovereign wealth funds, this Pension of Hedge s Manager Source: Preqin Hedge Investor Profi les Fig. 6.25: Mean Institutional Hedge Returns Expectations by Investor Type Mean Institutional Hedge Returns Expectation 12% 6% 2% 10.3% 8.7% of Hedge s Manager 6.7% 6.2% % Pension Source: Preqin Hedge Investor Profi les group of investors has gained attention in recent years as a result of their large size and resulting infl uence on institutional investing. Although sovereign wealth funds represent just of all hedge fund investors in terms of numbers, their contribution to hedge funds, in terms of the capital they invest, is much more signifi cant. Sovereign wealth funds are the third largest investor type when ranked by the amount of capital they allocate to hedge funds, currently accounting for 1 of all capital invested by institutions in hedge funds (Fig. 6.23). Although many sovereign wealth funds have been investing in hedge funds for several years the mean year of fi rst investment is 2006 across this group these sovereign bodies have been relatively slow to build up their exposure to the asset class. Currently directing

4 The 2015 Preqin Global Hedge Report - Sample Pages 7% of their assets under management to hedge funds, less than both private sector and public sector pension funds which began investing in hedge funds more recently, sovereign wealth funds have shown only small incremental changes in their allocation to the asset class over recent years. Sovereign wealth funds have also set conservative expectations for the performance of their hedge fund investments, seeking annualized returns of 4. on average, the lowest of any institutional group by some margin. In contrast, as a result of the need for these institutions to preserve and grow their assets for future generations, they take the longest-term outlook on investment in hedge funds, accepting lock-up periods of up to 40 months, almost twice as long as public pension funds which have similar long-term liabilities to meet. Currently, investment in hedge funds is relatively rare among sovereign wealth funds, with less than a third allocating capital to the asset class. Sovereign funds have shown greater interest in other alternative assets such as real estate and private equity funds in recent years, but there has been some indication that these funds are becoming more accustomed to hedge fund investment. For instance, sovereign entities such as Brunei Investment Agency have added to their portfolios in The threefold effect of rapidly expanding assets under management, the potential to increase allocations to hedge funds as a proportion of their assets under management, and more sovereign wealth funds making investments in the asset class for the fi rst time, could result in signifi cant infl ows from this important group of investors in the future. s plans were among the earliest adopters of hedge funds within the institutional investor landscape, having on average made their fi rst investment in hedge funds in 2001, some six years before pension schemes. Alongside beginning to invest in hedge funds before many other types of institutional investor, endowment plans have also put more of their total assets under management to work in the hedge fund industry. The current average allocation of an endowment plan is 18.9%, the highest of any single group of institutional investors (Fig. 6.26). Over the longer term, endowment plans have largely allocated a healthy portion of their portfolio to investments in hedge funds, maintaining an allocation of on average each year since Fig. 6.26: Mean Allocation to Hedge s by Investor Type, Mean Current Allocation to Hedge s as a Proportion of AUM (%) 25% 19.5% % 18.9% 18.7% 17.7% 18.7% 17.5% 16.6% 16.6% 10.5% 9.9% 9.3% % 6.9% 6.9% 6.6% 5% 2.5% 2.3% 2. The landscape of endowments investing in hedge funds is largely made up of those schemes linked to US institutions; 9 of active endowments are based in the US. It is these US schemes notably institutions like Harvard and Yale that have provided a model for the large scale use of alternative assets which has been adopted by many other institutional investors now allocating capital to hedge funds. s take a long-term approach to investment in hedge funds. These institutions are able to tolerate more illiquidity from their hedge fund investments and are willing to accept funds with longer lock-ups than other groups of investors (Fig. 6.24). Investors can tap into an illiquidity premium in terms of higher performance by investing in strategies which may require capital to be locked-in for longer periods of time. However, even though endowments seek higher returns than some groups, such as public pension funds, their mean annualized return expectation of 6. is moderate compared to groups such as family offices and funds of hedge funds (Fig. 6.25). This would indicate that although endowment plans are returndriven, it is the potential for diversifi cation and risk-adjusted returns over long timeframes that have attracted this group to investment in the asset class. This pursuit of diversification and riskadjusted returns is continuing to lead to endowments shifting more of their portfolio directly into hedge funds with fewer investments made via funds of hedge funds. Thirty-eight percent of endowment plans now invest solely in single-manager funds, an increase from 35% in 2013 and 33% in As endowments add more internal resource to monitor and assemble their hedge Pension fund portfolios, the shift towards a direct approach to hedge fund investment is expected to continue in order to help endowments meet their performance goals. s Source: Preqin Hedge Investor Profi les There are a large number of foundations across the globe that invest in hedge funds, with each foundation striving to protect and grow their assets in order to help fund a diverse range of pursuits, for instance scientifi c, educational, health-related, religious or other charitable endeavours. Combined, this group represents the largest number of institutional investors active in hedge funds today; 19% of all institutional investors with a current allocation to hedge funds fall into the foundation category (Fig. 6.22). Despite dedicating a signifi cant proportion of their total assets to hedge fund investment, currently standing at 17.7% of assets under management, the small size of many foundations means that their significance in terms of numbers investing in hedge funds is not refl ected in their contribution to the total amount of capital invested in hedge funds by institutional investors. Today, the total capital invested by foundations accounts for of all institutional capital at work in the hedge fund asset class, the sixth leading contributor to global institutional assets invested (Fig. 6.23). s encompass a broad range of institutions, from the large foundations such as Robert Wood Johnson, which has been investing in hedge funds for 16 years and has amassed a portfolio valued at more than $2bn, to foundations with small allocations to hedge funds, such as City

5 The 2015 Preqin Global Hedge Report - Sample Pages of Stockholm Trust which invests less than $4mn in a single multi-strategy fund of hedge funds. Each foundation will have its own needs from hedge funds driven by their own particular aims and requirements for their portfolio. As a result, there is a split in the approach taken by foundations as to how they invest in hedge funds. Approximately 35% of foundations invest solely through single-manager funds, invest only via funds of hedge funds, and the remaining foundations use a combination of the two approaches. Companies companies dedicate the smallest proportion of their portfolios to hedge funds of all institutional investors, currently directing 2. of their assets under management to investment in hedge funds, a slight decline from 2.5% in 2013 (Fig. 6.26). Some of this decline can be attributed to many European insurance companies continuing to prepare for the limitations imposed on their hedge fund portfolios by Solvency II, which is set to be fully implemented by European insurance companies account for just over 25% of all insurance companies in hedge funds, and many of these have started to alter their strategies in anticipation of the changes. Some are looking to exit the asset class altogether. For instance Storebrand, the Oslo-based insurance group, which, having run its own internal hedge fund previously, chose to exit hedge fund investment completely in the fi rst half of 2014 as a direct result of Solvency II s 49% capital charge. Despite allocating relatively smaller portions of their portfolios to investment in hedge funds, insurance companies have higher returns expectations (6.7% on an annualized basis) from these funds compared to other groups of institutional investor, such as pension funds, endowments and foundations (Fig. 6.25). In turn, insurance companies are looking to achieve this higher level of return by investing more capital directly in single-manager funds. Forty-fi ve percent of insurance companies only invest directly in funds, compared to 3 of endowments and 2 of public pension funds. companies can represent very large assets under management, so even a small allocation to hedge funds of 2. can translate into signifi cant amounts of capital in absolute terms. Although representing just of institutional investors by number (Fig. 6.22), the capital invested by insurance companies accounts for 7% of all assets invested by Fig. 6.27: Breakdown of Institutional Investor Types by Hedge Investment Approach (Direct s, s of Hedge s, or a Mixture of Both) Proportion of Investor Type institutional allocators (Fig. 6.23). Recent regulatory reforms in the insurance company sector may be impacting the amount that insurance companies can direct to hedge fund investment; however, it is clear from their returns expectations and their direct approach to investment in the asset class, insurance companies as a whole have confi dence in hedge funds to perform well as part of their wider portfolios. Outlook 3 32% 2014 brought many challenges for the hedge fund industry; performance was mixed and a few large investors scaled back their investments. This in turn created concerns about the effect this would have on an industry that had only just recovered from the 2008 crisis. However, there is no sign that investors are pulling capital out of the asset class; in fact, most leading groups of investors have increased their allocations to hedge funds. We also have witnessed a continued shift for most groups of institutions to put more capital directly into hedge funds, as they grow their own Data Source: 72% 2 internal teams to better manage and source new opportunities. Today, Preqin tracks more than 4,800 institutional investors currently active in the hedge fund asset class. There are some clear differences between each leading group of institutions as a whole in not only their needs from hedge funds, but also their approach to investment in the asset class. Beyond this, each individual investor will have its own particular set of needs and requirements from its hedge fund portfolio. If the turbulent performance of 2014 continues into 2015, and we see investors paying more attention to how hedge funds fi t into their portfolio, it will be more important than ever for fund managers and other industry professionals to understand not only the needs of each type of investor be that public pension funds or insurance companies but also the unique needs of each investor as an individual entity. Preqin s Hedge Investor Profiles is the industry s leading source of intelligence on institutional investors in hedge funds and features detailed profi les for over 4,800 investors worldwide. Profi les include current and target allocations to hedge funds, strategy and geographic preferences, future investment plans, direct contact details for key decision makers and much more. For more information, or to arrange a demonstration, please visit: 35% 45% 22% 36% 33% % 52% Pension % Direct s s of Hedge s Mixture of Direct and s of Hedge s Source: Preqin Hedge Investor Profi les