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Pension Funds Continue to Dominate Hedge Fund Inflows – March 2014

by Michael Haimson

  • 04 Mar 2014
  • HF

Public and private sector pension funds represent one of the largest contingents of investors in the hedge fund asset class, comprising approximately 24% of all hedge fund investors tracked by Preqin’s Hedge Fund Investor Profiles, but representing a significant 41.3% of all capital invested in hedge funds by institutional investors. Hedge fund allocations of pension funds have shown a significant increase over the previous two years, driving hedge fund inflows to a large degree.

Public pension funds represent 9% of hedge fund investors tracked by Preqin, and 22.4% of institutional capital invested in the asset class, making it the largest institutional investor type in the hedge fund asset class in terms of capital committed. Public pension funds saw a steady increase in mean hedge fund allocation in 2013, increasing from 6.9% in December 2012 to 7.5% in December 2013. Furthermore, with a current mean target allocation to hedge funds of 8.3%, public pension funds are on average under allocated to the class.

Although private sector pension funds represent a larger proportion of investors, at 15% of all active hedge fund investors on the Preqin database, they account for a smaller amount of invested capital. Private sector pension funds represent 18.9% of all institutional capital invested in hedge funds, making this the second largest investor type behind public pension funds. While the average public pension fund is nearly three times the size of its private sector counterpart, private sector pension funds have also seen a steady increase in mean allocation to hedge funds, from 9.3% in December 2012 to 9.9% in December 2013. With a current mean target allocation to hedge funds of 10.1%, private sector pension funds are operating at close to their target policy for the asset class.

While both of these investor groups have been shifting away from funds of hedge funds and towards investing with single-manager hedge funds in recent years, private sector pension funds have been much more aggressive in this regard when compared to their public counterparts. Thirty-two percent of private sector pension funds invest in hedge funds solely through single managers, which is nearly twice the figure for public pension funds (17%).

As pension funds continue to implement the Yale Endowment Model, it is safe to assume that both of these investor groups will continue to dominate new hedge fund inflows as they reach their target allocations to hedge funds, and continue to increase their exposure to the asset class. With the average endowment plan maintaining an allocation to hedge funds of 18.9%, there is still room for both public and private sector pension funds to increase their respective hedge fund allocations in the future. Additionally, if it is to be surmised that public pension funds are following the same path as private sector pension funds just at a slower pace, one can predict continued inflows from the former dramatically shaping demand for hedge funds going forward.

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