Does Size Matter When Looking at US Endowments' Investments in Hedge Funds? – September 2014

by Brian Orlay

  • 17 Sep 2014
  • HF

According to Preqin’s Hedge Fund Investor Profiles, endowments account for 13% of all hedge fund investors and 11% of all capital invested in hedge funds worldwide.  The US is the undisputed home to the majority of endowments investing in hedge funds: 93% are based in the US, accounting for 98% of all hedge fund investments made by endowments globally. In this blog, Preqin takes a closer look at the US-based endowments and how their hedge fund preferences change based on the size of the endowment. 

Eighty-one percent of US-based endowments have less than $1bn in funds under management, and allocate an average of 18% of their total funds under management to hedge fund investments. When taking a closer look at their structural preferences, approximately 60% of these small endowments invest in funds of hedge funds, followed by 52% that make direct investments in single manager funds. Just 2% of these small investors allocate capital to direct managed accounts. 

Medium-sized endowments, those with funds under management of $1bn to $5bn, account for 15% of investors, allocating an average of 23% of funds under management to hedge fund investments. Unlike small endowments, the most prevalent hedge fund structure for these medium-sized endowments is single manager funds, with 93% of endowments investing in these funds. Thirty-three percent of medium-sized endowments allocate capital to commingled funds of hedge funds, and 10% of these endowments invest through managed accounts, a significantly larger proportion than for small endowments. 

Large endowments with over $5bn in funds under management make up the remaining 4% of US-based endowments, allocating an average of 21% of their funds under management to hedge fund investments. Much like their medium-sized cohorts, single manager funds are the most prevalent structure used by large endowments, with 85% investing in these funds. Funds of hedge funds represent 24% of large endowments investing in the asset class, a significantly smaller proportion than that of small endowments, and 10% of these investors allocate capital through managed accounts. 

Preqin’s Hedge Fund Investor Profiles product shows that the investment preferences of US-based endowments vary significantly depending on their funds under management.  Preqin’s data demonstrates that endowments with more than $1bn in assets under management are more likely to utilize their greater resources by diversifying their hedge fund portfolios across a number of direct hedge funds rather than via funds of hedge funds. By contrast, smaller endowments with more limited resources, both with regards to investment team size and capital available, are much more likely to look to funds of hedge funds to provide this diversification for them.

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