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Institutional Investors in Funds of Hedge Funds

by Amy Bensted

  • 18 Jan 2010
  • HF

Preqin monitors 741 institutional investors with an active interest in funds of hedge funds, currently the most popular investment style utilised by hedge fund investors. However, there was a decline in the proportion of investors with an active preference for funds of funds over 2009 compared to 2008 (57.1% of investors in 2009 versus 64.2% of investors in 2008). Over the course of 2009, the fund of funds industry underwent some scrutiny following larger than average losses in 2008 and some high-profile vehicles having exposure to the Madoff funds, both of which brought the due diligence procedures the value of funds of funds into question. Over 2009, there was a shift towards institutions making direct hedge fund investments alongside fund of funds investments, and currently 45% of all funds of funds investors also make strategic direct hedge fund investments. Funds of hedge funds are still the investment method of choice for newer or smaller investors in hedge funds, which use these vehicles to gain a greater understanding of the asset class and to create a diverse portfolio of funds through a single investment. Funds of hedge funds are also used by both new and established investors seeking exposure to new strategies or regions. 

Public and private pension funds are currently the most active investors in funds of hedge funds, with 84% of all public pension funds and 58% of all private pension funds stating funds of hedge funds as a strategic preference. North American institutions are the most common investors in funds of hedge funds, with more than half of all investors in the strategy based in the region. However, proportionally, the use of funds of hedge funds greatest in Europe, where more than two-thirds of all investors have at least one fund of hedge funds in their portfolio.

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