Following the financial crisis in 2008, many institutions put all new hedge fund investments on hold and redeemed some existing hedge fund holdings, either to meet short-term liquidity requirements or because of poor performance. Consequently, at the end of 2008 and the beginning of 2009, there were net outflows of assets from hedge funds and the industry suffered a significant contraction. However, the industry has recovered swiftly and in 2009 many funds have generated their best returns in years, with many hedge funds capitalising on the opportunities created as a result of the downturn. Institutional investors have steadily been making new investments in hedge funds over the second half of 2009. Additionally, Preqin has found that 29% of institutional investors intend to increase the amount of capital they invest in hedge funds over 2010, with 51% maintaining their existing exposure and 20% decreasing their current exposure. However additionally of those investors that are seeking to maintain their current allocation to the asset class 27% are also looking to make investments in new funds as they seek to rebalance their portfolios and to take advantage of the latest opportunities and the best performing hedge fund strategies
Institutional investors are an essential source of capital for hedge fund managers: by obtaining institutional backing, emerging hedge funds become established, medium-sized funds become large funds, and managers have access to a long-term source of capital. In comparison to high-net-worth individuals, they have proved more likely to stick with their hedge fund investments through the market crisis and their confidence in the asset class is returning following the events of last year. Managers that are able to cater to the demands of institutional investors will be the ones which will gain their support in 2010.
For extended analysis please click here for more information about 2010 Preqin Global Hedge Fund Investor Review. The review contains investment profiles for 1,000 institutional investors active in the asset class as well as indepth analysis on all the key trends in the industry.