27/06/2008

US institutions still committed to hedge funds, study finds

Nearly half of all US institutions now invest in hedge funds, with lagging returns not deterring them from continuing to invest, according to research report released Thursday from consulting firm Greenwich Associates.

While the report found that capital allocated to hedge funds by institutions did not change from 2006 to 2007 – a stagnation in a trend that had previously seen several years of steady growth – nearly 45% of institutions in the US invest in hedge funds, suggesting US pension funds, endowments and foundations remain strongly committed to the asset class.

According to the report, the average hedge fund receives 13% of its assets directly from pensions, endowments and foundations. High-net-worth individuals and family offices remain the biggest sources of assets for the average hedge fund, accounting for 37% of the total, which does not include about 10% of assets provided by the funds’ employees and general partners, according to Greenwich Associates’ consultant John Feng.

However, at the world’s biggest hedge funds, institutional investors have overtaken high-net-worth individuals and family offices as the key source of assets. Institutions now account for 25% of assets at larger hedge funds, with 22% coming from high-net-worth individuals and family offices.

Despite the shift, funds of hedge funds (FoHFs) remain the largest source of investment for hedge funds with more than $1bn, providing 27% of assets, up from 25% a year ago.

Hedge funds represented 2.6% of institutional assets in 2007— up from 2.2% in 2006 and 1.9% in 2005. When converted to dollars, US institutions’ investments in hedge funds totalled some $195bn in 2007, up from $140bn in 2006 and $113bn in 2005.

The report further found that roughly one quarter of US institutions said they planned to increase their allocations beyond current levels by 2010, while only 2% said they planned to reduce them.