Industry Growth Expected as Private Wealth Leads Hedge Fund Inflows – September 2014

by Arun Chopra

  • 26 Sep 2014
  • HF

Preqin’s Hedge Fund Investor Profiles online service currently tracks 774 family offices and wealth managers considering or currently allocating to hedge funds. Our data reveals that private wealth firms with current hedge fund allocations have seen an increase in their assets under management (AUM) from 2013. These investors have an average of $17.3bn in AUM compared to last year’s average of $13bn. Furthermore, as of September 2014, the average hedge fund allocation from these investors was 17.5%, an increase from 16.03% in 2013. It is clear that the growth of institutional private wealth has correlated with the increase in investors’ average hedge fund allocation and as a result, these investors represent a significant source of capital for hedge fund managers and the industry alike. Here we look at how private wealth is driving the increase in hedge fund inflows compared to other investors, and to what extent the hedge fund industry can expect to grow further.

A survey featured in Preqin's Hedge Fund Spotlight - August 2014 cited that 59% of fund managers witnessed an increase in capital allocations from high-net-worth individuals. There was also an increase in allocations made by family offices and wealth managers, according to 58% of managers who cited this in the case of both investor types. Moreover, there has been an increase in allocations into the asset class reported by hedge fund managers from other investors other than private wealth sources. Retail investors, for example, increased allocations made to hedge funds according to 47% of fund managers, while 40% saw an increase of capital inflows from funds of hedge funds. With a growth in average assets under management and a rise in average hedge fund allocation, it is clear that private wealth investors appear to be leading the way for increased inflows into the asset class.

The boost in assets invested by private wealth firms, along with the moderate increase from other institutional investors, has led the hedge fund industry to grow to $2.90tn in assets under management as of 31 July 2014. Preqin estimates that institutional capital now represents 63% of all hedge fund assets, compared to 65% at the end of 2013. Despite the minor decrease, some institutional investors have continued to increase the capital they invest in hedge funds, while private wealth investor groups are increasing their capital allocation to hedge funds at an even faster rate. 

As seen in the chart above, the hedge fund industry has been growing each year since 2010 and does not look to be slowing down. Seventy-seven percent of fund managers interviewed expect an increase in the overall industry AUM in the second half of 2014. As fund managers are witnessing increased allocations by private wealth investors, they will be under pressure to expand strategy and product offerings to these investors while improving performance, which has underperformed public market benchmarks since the financial crisis. Through this data, we can conclude that the hedge fund industry is continuing to grow, with the private wealth sector as a leading contributor.

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