The perception has long been that those who invest in hedge funds are high net-worth individuals – the very wealthy. That was largely true when hedge funds first began many years ago, but it is no longer the case. Today, investors in hedge funds are more likely to be institutions such as university endowments, charitable foundations, public and private sector pension funds and sovereign wealth funds.
This investor transformation has been a gradual process that reached a material milestone last year when, according to research by AIMA, institutions for the first time accounted for an absolute majority of hedge fund assets under management. Research has also shown that during much of the past 10 years, institutional investors represented the majority of net new investment capital in the industry. Such institutional interest is also evident among smaller hedge fund managers and many institutional investors are early stage investors with smaller funds, even start-ups, believing they offer the opportunity for attractive returns.
Of capital from institutions, AIMA’s research suggests that about one-third comes from pensions. Pension managers describe their interest in hedge funds as higher quality returns as well as additional risk management expertise and trading or market nimbleness - attributes which are particularly valued in recent volatile markets. From a macro perspective, advanced economies across the world are facing demographic pressures, and the funding positions of many pensions are challenged. Hedge funds are viewed as offering better risk-adjusted returns than other asset classes.....