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US public pensions’ increase appetite for direct investment.

by Alex Jones

  • 04 Oct 2010
  • HF

US public pension funds, which have traditionally been the most prominent investors in funds of hedge funds, have began making the shift to direct investment with single manager hedge funds in greater numbers.

Q3 2010 saw several prominent US public pension funds make increased allocations to single manager funds. The USD 1.8 billion San Antonio Fire and Police Pension Fund revealed that it is in the process of divesting its entire portfolio (currently made solely of funds of hedge funds) and was planning to re-allocate directly. The USD 3.6 billion Philadelphia Board of Pensions & Retirement hopes to allocate USD 140 million to as many as 12 single hedge fund managers over the next 12 months. Whilst a historical investor in funds of hedge funds since 2005, the pension has been adding more direct investments as it has become more experienced in the hedge fund universe – a common trend across the hedge fund universe as a whole.

Preqin’s recent research has indicated that whilst nearly two thirds of institutional investors made their maiden investment into hedge funds via funds of hedge funds, many soon move towards direct investment. Typically, funds of hedge funds are attractive to US public pension funds as they are able to offer established strategies, diversification/risk management and opportunities for familiarization with the industry. Despite this, 2010 saw the USD 118 billion Florida State Board of Administration bucking the trend by making its maiden hedge investment of USD 200 million into four single managers. Moving forwards the pension intends to build a portfolio over the next 2-3 years worth USD 2-3 billion, made up of approximately 20 strategically diverse single managers.

Statistically, funds of hedge funds remain important to US-based pension funds and are still very attractive to many maiden investors. Preqin research indicates that 42.9% of US public pensions investing in hedge funds do so solely through funds of hedge funds, whilst 24.7% invest directly and 32.5% use both structural formats. Despite this, greater levels of in-house experience, discontent regarding fee layers as well as a wish for greater portfolio control and liquidity may continue the trend of US public pensions viewing direct investment as a more viable and attractive alternative.

Preqin monitors 247 US public pension funds with an interest in hedge funds on its institutional investor database, Hedge Fund Investor Profiles. For more information on Preqin’s Hedge Fund Investor Profiles database, please see Hedge Investor Profiles.

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