Preqin’s Hedge Fund Investor Profiles online service tracks over 4,900 institutional investors globally with either a current allocation to hedge funds or an indication that they are considering investing in the asset class. The hedge fund institutional investor universe can be categorized by public institutions (public pension funds, sovereign wealth funds, government agencies) and private institutions (excluding funds of funds), each with their own unique needs and requirements from their hedge fund allocations. Here, we take a look at the hedge fund preferences and characteristics of public and private investors within the institutional investor universe.
There appears to be an inverse relationship between public and private investors when it comes to the amount each group allocates to hedge funds, as shown in the chart below. The largest proportion of public institutional investors (23%) allocate between 2.5-4.99% of their portfolio to the asset class, whereas the largest proportion of private investors (18%) allocate more than 25% of their assets to hedge funds, indicating a healthy degree of confidence for the asset class. The majority of public investors (84%) are willing to invest up to 10% of their assets in hedge funds compared to 41% of private investors.
Liquidity needs are an area of concern for many investors; quick access to their capital is a high priority. Most investors accept lock-up periods, including 86% of private investors and 79% of public investors. Though private funds are more accepting on the whole, public investors appear to be more tolerant of lock-ups exceeding three years: 9% of public investors state this compared to 5% of private investors.
To institutional investors, emerging managers offer the potential for new and innovative strategies, but come coupled with risk in the absence of a track record or by virtue of being a small fund manager. Twenty percent of private investors have indicated that they would invest in hedge fund managers with at least a one- or two-year track record, compared to 12% of public investors. This trend also applies to fund size with 54% of private investors willing to invest in a small fund (less than $250mn AUM), significantly more than public investors (24%). Furthermore, 32% of public investors require a fund to have $1bn in assets before they will invest.
The data shows a clear contrast between public and private institutional investors and their preferences when investing in hedge funds. This contrast presents opportunities for managers of different sizes, and creates different segments where managers can attract more capital from these large investors.