The UK And EU Hedge Fund Industries by Preqin
The $1bn Club: The Largest Investors in Hedge Funds
Following on from our feature article last month, Yoosun Chung takes an in-depth look at institutional investors in the $1bn Club allocating at least $1bn to hedge funds, including their significance, investment preferences, changes since last year and new entrants.
Following our May issue of Hedge Fund Spotlight, in which we took a closer look at the largest hedge fund managers in the industry, we examine the largest investors that are currently active in hedge funds – those with $1bn or more allocated to hedge fund investments. Collectively, this pool of investors allocates vast sums of capital to the hedge fund sector; approximately one dollar in every four invested in hedge funds today comes from the coffers of an institution with $1bn or more invested in hedge funds.
As a result, this group of investors are of great influence within the hedge fund industry. Their investments have come under scrutiny in recent years, particularly as a result of a handful of high-profile institutions, notably starting with CalPERS in September 2014 and latterly NYCERS in 2016, deciding to cut hedge funds from their portfolios entirely. With factors such as fees, performance and ultimately the value of hedge fund investments often cited as a deciding factor in cutting hedge funds from the holdings of some of these large investors, the question that is often asked is: “is this the start of a mass exit from hedge fund investment among the largest investors in hedge funds?”
As this article will reveal, the answer, for now, is “No”. Although a small number of this group have streamlined or cut their hedge fund investments over the past year, more institutions have entered the $1bn Club for the first time in 2016 and more investors in the group have increased their allocations to hedge funds than withdrawn investment. As a result, there are more investors than ever allocating $1bn or more to hedge funds, with a combined sum of capital that is larger than ever before (Fig. 1).
The $1bn Club in 2016
There are currently 238 institutional investors that invest $1bn or more in hedge funds, a net increase of 11 investors since our last $1bn Club report in May 2015. Collectively, this group invests $763bn in hedge funds, a 4% increase from $735bn in May 2015. Over the course of the past year, 40 institutions have entered the $1bn Club, while 29 investors have fallen out of the $1bn Club after reducing or cutting their exposure to hedge funds (Fig. 2). Combined, private and public sector pension funds represent nearly half of new entrants to the $1bn Club. An example is US-based Mars Pension Fund: over the past 12 months, the private sector pension fund has increased its hedge fund allocation from 14% to 24% of total assets, increasing its total investment in hedge funds to $1.1bn.
Public pension funds account for the largest proportion (27%) of total $1bn Club capital (Fig. 3). Although over the past 12 months the decision by NYCERS to cut its $1.5bn hedge fund portfolio made the headlines, other large pension funds have been doing the opposite and increasing their exposure.
For instance, Regents of the University of California and State of Wisconsin Investment Board have both increased their hedge fund allocation by $1.2bn since our previous $1bn Club study in May 2015.
Private sector pension funds represent 16% of the $763bn committed to the hedge fund industry by the $1bn Club. As well as private sector pension funds representing the largest number of new entrants into the $1bn Club, more than half (55%) of existing private pensions have increased their exposure to hedge funds since May 2015 (Fig. 4). Among these is Boeing Company Pension Fund, which added $2.4bn to its hedge fund portfolio over the 12 months to December 2015, and Delta Airlines Pension Fund, which increased its hedge fund allocation by $1.7bn.
North America is home to the most institutions active in hedge funds today, so it is somewhat unsurprising that institutions in this region represent the greatest amount of capital invested in hedge funds by the $1bn Club (62%, Fig. 5). Europe accounts for 23% of the capital committed to the hedge fund industry by the $1bn Club, a slightincrease from 12 months ago (21%). Asia-Pacific represents 10% of $1bn Club capital, even though the number of investors in this region account for just 6% of all institutions in the $1bn Club. Capital allocated to hedge funds from all other regions is dominated by Abu Dhabi Investment Authority, with the sovereign wealth fund committing 97% of the region’s $1bn Club capital share.
$1bn Club vs. All Other Investors
The group of investors that comprise the $1bn Club has established itself over a number of years; the average $1bn Club investor made its first allocation to hedge funds in 2003. These institutions have
signifi cant resources, not only in terms of assets but also in regards to human capital. With such large allocations to hedge funds, the $1bn Club investors often employ dedicated individuals and teams focusing on hedge fund investment in order to build and oversee hedge fund portfolios. As a result of the sophistication and expertise of these investors, they are more likely to create portfolios of single funds themselves – without the need for funds of funds to do this on their behalf – compared with other types of institutional investors (Fig. 6). However, nearly half (47%) of the $1bn Club continue to use funds of hedge funds to some extent within their portfolios, in order to diversify holdings and leverage the expertise that these multi-managers may have in specific areas or sectors, such as emerging managers or emerging markets for example.
The average $1bn Club investor portfolio is diversified across 33 hedge funds; in comparison, smaller investors hold just eight hedge funds (Fig. 7). However, both groups of investors have demonstrated their commitment to the hedge fund asset class over the past 12 months: the $1bn Club’s mean allocation has increased from 15.9% of total assets in May 2015 to 16.8% as of June 2016, while the mean allocation of all other investors has increased from 14.3% to 14.8%. Investors with at least $1bn invested in hedge funds require an average track record of 3.1 years from a hedge fund, shorter than the average requirement of all other investors at 3.8 years. However, due to internal policies or decisions to avoid making outsized investments in a single fund, $1bn Club investors look to invest with larger funds; on average, they require managers have at least $846mn in AUM compared with all other investors, which require $547mn.
With just 238 investors allocating $1bn or more to hedge funds, the $1bn Club