In a blog in April 2013, Preqin examined the make-up of private sector pension funds within the hedge fund universe. At this time, it was noted that there had been a steady increase in the average allocation to hedge funds by private sector pension funds, from 8.2% in 2011 to 9.3% in 2012 and 9.5% in 2013. One year on, and Preqin’s Hedge Fund Investor Profiles online service shows that this has increased further, with private sector pension funds now allocating an average of 10.5% of total assets under management to hedge funds. As demonstrated by this allocation increase, private sector pensions are key players within the hedge fund asset class, and these investors account for a significant proportion of institutional capital invested in hedge funds.
In contrast to the indication of more activity from private sector pension funds from their increased allocations, there has been a slight reduction in the proportion of fund searches initiated by these investors in the early part of 2014. In The Q1 2014 Preqin Quarterly Update it was revealed that private sector pension funds accounted for just 1% of all fund searches in Q1 2014, compared with 3% in Q4 2013 and 5% in Q3 2013. These investors could have been waiting until later in the year to make new allocations; private sector pension funds represent 7% of all searches initiated in May so far, which suggests that their Q2 proportion will show an increase from Q1.
In terms of the locations of private sector pension funds active in hedge funds, 60% are based in North America, followed by 29% based in Europe, with the remaining 11% based in other regions. North America-based private sector pension funds have the largest average hedge fund allocation, at 11.6% of total assets. On the other hand, Europe-based private pensions are more conservative when it comes to hedge fund investing, and these investors have an average hedge fund allocation of 7.1%.
Fund of hedge funds vehicles continue to be the most utilized fund structure for private sector pension funds investing in hedge funds, with 33% of private pensions making all of their hedge fund investments through multi-manager structures. However, this is a notable decrease from 2013 when 40% of these pension funds invested in hedge funds solely via funds of funds. This indicates that a number of private pension funds have moved capital towards direct investments in hedge funds and this is a trend that could continue as more pension funds gain the experience and resources necessary to invest directly.
Despite the reduction in searches initiated by private sector pension funds in the early stages of 2014, there are still a number of notable private pension funds looking to make new hedge fund investments over the next 12 months. One such investor is Laborers International Union of North America; this $2.2bn pension fund anticipates making up to five new hedge fund investments over the coming year, having recently redeemed from its existing investments.