The bias of hedge fund investors towards domestic markets has been a long acknowledged trend among investors globally, as illustrated in the chart below, which shows a breakdown of investors in North America, Europe and Asia-Pacific by location of headquarters and regional investment preferences. Preqin’s Hedge Fund Investor Profiles online service contains detailed profiles for over 4,900 institutional investors worldwide. The chart shows that the benefits of a globally diverse portfolio feature heavily in the hedge fund preferences of these investors, and that such investors also show an appetite for their respective domestic regions. This blog will look at the extent to which investors have exhibited a regional bias in their hedge fund investments.
Looking more closely at the chart above, investors based in North America, Europe and Asia-Pacific all appear to have the largest preference for global opportunities, regardless of their own location. Theoretically, a globally diverse portfolio offers investors returns while mitigating risks associated with investments concentrated in one area or market. This preference is most notable among North America-based hedge fund investors, where 81% of investors in the region have a global outlook for their hedge fund investments.
Beyond this, however, there is evidence to suggest that regional bias does play a role in the way investors allocate capital. In each of these three regions, investors displayed a greater preference for investing within their own region compared to any other region. This is evident among North America-based hedge fund investors, of which 79% have a preference for domestic opportunities; 57% of Europe-based investors prefer to invest in Europe and 51% of Asia-Pacific-based investors in Asia-Pacific.
Portfolios with exposure to regions other than their own are vulnerable to exchange rate risk and dealing with the cost of operations further afield. The due diligence process many investors go through before investing in funds may also limit an investor’s ability to assess funds in other regions, which would be more likely to invest in foreign markets. Riksbankens Jubileumsfond, for example, is a Sweden-based foundation, and invests only in funds within Sweden in order to simplify its due diligence and operational processes. Despite the level of home bias among hedge fund investors, many investors in each region still invest in funds with global exposure.