| Market downturns bolster allocations to hedge funds |
|
|
| 02/09/2007 | |
|
Following the onset of the bear market in 2000, a number of pension funds reconsidered their heavy weighting in equities and began to look at alternatives such as hedge funds as uncorrelated investments. Today, hedge funds account for half of the total value of assets in the alternative universe, estimated at $3tr. A new study concludes that their growth has been driven, in part, due to the market downturn seven years ago as an increasing number of institutional investors sought diversification. Yet only half of institutional investors are invested in hedge funds and the size of their average allocation remains modest at less than 3% on average, according to Northern Trust and Create, a UK think tank. The allocations are higher in the United States and Japan than in Europe. "UK institutional investors are far more cautious than their peers on the Continent, and in many instances, their first move has been typically via the hedge fund-of-fund route." The study also found that two in three institutional investors believe that high hedge fund returns depend on an inflow of new talent, rapid innovation and deployment of new strategies. There are widespread doubts in each of these areas explaining the relatively low allocations to the asset class, according to the study. "Those investing prefer 100% liquidity with no lock-ins. Nor are investors convinced that hedge fund managers can scale their business without sacrificing performance, or that regulation can prevent periodic blow ups. Neither of these would be a formidable deterrent if the existing prime capacity was scalable. It is not." The study identifies three scale points, expressed in assets under management. "Single strategy managers need a critical mass of $100m to break even. They prefer to go multi-strategy in the $1bn to $4bn range to avoid style drift. Most fund-of-funds can be scaled up to $15bn." In other findings, there seems to be a growing convergence between the strategies pursued by mainstream funds and hedge funds. As a strategy, absolute return, for example, was a central theme in the 1960s and 1970s, before relative return and benchmark hugging became more dominant. Today, more mainstream funds are pursuing hedge fund type strategies such as unconstrained investing and 130/30, according to the study. Investor appetite for hedge funds evaporates as markets recover. "Beta will remain the main source of wealth creation in the medium term," the study concludes. VB |
|
© Copyright 2008 bfinance. This document is for your personal non-commercial use. Any further copying, reproduction, distribution is strictly prohibited. To obtain permission please contact This e-mail address is being protected from spam bots, you need JavaScript enabled to view it