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California-Based Hedge Fund Investors – August 2012

by Michael Haimson

  • 22 Aug 2012
  • HF

By population, California is the largest US state; if it were a separate country, its GDP would rank 9th in the world. California’s wealth is derived from a diverse range of industries, including entertainment, high technology, and agriculture. The characteristics of California’s economy provide a base of institutional investors that represent a major force in the hedge fund industry.

Currently, Preqin tracks 258 hedge fund investors based in California. Together they manage over $2.4tn in assets, with the median investor having $374mn in assets under management and allocating 12.3% of its portfolio to hedge funds with a 15% target to the asset class. Typically, investors have 10 hedge funds in their portfolio, and have been investing in the asset class for 8 years.

When it comes to the types of institutional investors based in California, foundations represent the largest number of hedge fund investors (34% of the overall universe). While foundations do not represent as large a portion of total assets under management, their numbers and diverse strategic preferences present great opportunities for both small and large managers. The second most prominent investor type is endowment plans, which make up 17% of the California investor universe. California’s private and public institutions of higher learning, such as Stanford University and University of California, Berkeley, are large investors in alternative assets such as hedge funds, and aim to produce returns to support the operations and expansions of these colleges and universities. Wealth managers and family offices also represent a significant portion of investors, revealing the large number of high net worth individuals residing in California. Additionally, California-based pension funds, both private and public, have begun investing in hedge funds over recent years as rising benefit costs and falling revenues collide, forcing these pension schemes to pursue higher returns.

In terms of fund type preferences, commingled structures are the most common. While direct investments with hedge fund managers are preferred over funds of hedge funds, both are often utilized in constructing hedge fund allocations. Managed accounts (both direct and fund of hedge funds) are primarily utilized by larger investors.

While many investors approach hedge funds with diversification in mind (with 43% of investors invested in multi-strategy funds), 54% of California hedge fund investors have some exposure to long/short equity. Over 20% of investors have exposure to one or more of the following strategies: event driven, distressed, long/short credit, or macro. Various arbitrage strategies and managed futures are also favoured.

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