The institutional investor landscape is broadening – even just a few years ago hedge funds could expect to gain investment from just two or three groups of institutional investors, primarily fund of hedge funds, public pension funds and endowments. Today we are witnessing rapid growth in the numbers of private sector pension funds as well as family offices and foundations which are making their first investments in the hedge fund asset class. This coupled with an increasing saturation of the older hedge fund institutional market has meant that hedge funds are being utilised by an increasingly broad spectrum of investor. Growth in these newer entrants into the hedge fund asset class is outpacing growth in the more established investor market and we predict that these new institutional investors will become increasingly important sources of capital for hedge funds. However the past 12-18 months has made the institutional investor market much more conservative than they were this time last year. Most institutions have reduced their exposure to hedge funds – although in the main part not significantly, and are searching for hedge funds which produce more conservative returns and have shorter lock-up periods. During the boom of the hedge fund industry many investors sought huge returns from highly leveraged highly volatile funds and were caught out when the market turned. However today, the institutional market appears to be returning to the core ideal of investment in hedge funds: to diversify their portfolios, for asset protection not outsized growth and to produce returns uncorrelated to the broader equity markets.
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