Three institution types dominate hedge fund allocations

The total capital allocated to hedge funds globally by institutional investors is more than $2 trillion but a new report says the largest allocations come from just a few.

While there are more than 5,250 institutions investing in hedge funds, 45% of the total institutional investor universe; analysts at Preqin report that just three investor types represent more than half of the total allocations. 

The largest number of active institutions are foundations, of which there are 956. This is followed by private sector pension funds (776) and fund of hedge fund managers (684).

Pension funds, private and public, hold 15% and 9% of hedge fund investors respectively, but they account for 19% and 22% of institutional capital in the asset class.   

Sovereign wealth funds account for 10% of all invested capital, despite only 24 of them investing in hedge funds.

Meanwhile, endowments (602 investors) and foundations (956 investors) allocate 19% of their capital to hedge funds but also account for 10% of the total capital invested in the asset class.

Eighty-three percent of endowments and 66% of foundations invest in hedge funds. Just 34% of sovereign wealth funds and 29% of insurance companies do, the only investor types with a minority active in hedge funds

“Although many more endowments and foundations are actively investing in hedge funds, typically with much higher allocations to the asset class, their total allocations are only on par with these groups, due to the sheer size of many of these pension and sovereign wealth funds,” said Amy Bensted, head of hedge fund products.

She added that it’s perhaps not surprising that the largest investors carry a great deal of influence in the asset class but that there are thousands of other institutions all using hedge funds in their portfolios.

“Each has their own unique challenges, so gaining an understanding of their needs on both a macro and an individual level is an important first step for fund managers seeking to raise capital from institutional investors in 2018,” she said.