Citi Prime Finance Survey Shows Rapid Shift to Direct Investing in Hedge Funds by Pension and Sovereign Wealth Funds

Institutional fund managers have undertaken a dramatic shift to direct hedge fund investing following the global financial crisis, according to a new survey from Citi Prime Finance. The survey, “Global Pensions and Sovereign Wealth Funds Investment in Hedge Funds: The Growth and Impact of Direct Investing”, is based on in-depth qualitative interviews with nearly 60 major investors representing $1.65 trillion in assets under management as well as hedge fund managers representing $186 billion in assets under management, reveals that pensions and sovereign wealth funds have not only been increasing their hedge fund investment programs but are taking a more active and “direct” approach to allocating these investments, as opposed to using traditional fund of funds. This trend has significant implications for hedge fund managers seeking to attract this capital.

“While the conventional wisdom is that directly allocated capital is going only to the largest hedge fund managers, we actually found that smaller hedge funds managing between $1 billion and $5 billion experienced the largest net growth in 2010,” said Sandy Kaul, US Head of Business Advisory Services.

“Fund managers in this range occupy a ‘sweet spot’ for investment allocators, with interest extending as low as $500 million in developed markets and $250 million in emerging markets. Above $5 billion we see a bifurcation in the industry among hedge fund managers that are limiting new investment and those that are developing into larger asset management organizations,” said Ms. Kaul.

Citi’s research indicates that the global pension and sovereign wealth fund allocation to the hedge fund asset class stands today at approximately three percent of the global pension and sovereign wealth fund asset pool of $31 trillion, or $820 billion. The continued growth from these sectors is discussed in depth in the survey and presents both opportunities and challenges to hedge fund managers seeking to attract these investments, which are often described as “sticky money” due to their longer-term investment horizon.

“Size is not the only factor in attracting Institutional capital, and other aspects of maturity and stability are equally important in reaching an institutional threshold to make investors attracted to these managers”, said Chris Greer, Global Head of Capital Introductions.

Among other key survey findings:

  • Direct allocator hedge fund portfolios are typically small with only 20-50 managers. Interviewees usually made only 1-4 allocations per year, writing few, but large tickets ranging from $25 to $100 million USD.
  • Partnership is key; Emphasis was placed on the “partnership” forged between the direct allocator and their selected managers and on the longer-term investment focus of their portfolios.
  • Pension and Sovereign Wealth Fund direct allocators have not yet settled on a standard model or approach as most still look to outsourced CIOs, consultants or fund of fund advisors to support their direct allocating efforts.

“Educating hedge funds on what it takes to attract and maintain these long term investments is becoming a key role for Prime Brokers who understand both sides of this investor-hedge fund manager dynamic” Mr. Greer said.

“Global Pensions and Sovereign Wealth Funds Investment in Hedge Funds: The Growth and Impact of Direct Investing” is available at:

About Citi

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Citigroup Inc.
Danielle Romero-Apsilos, New York
Jeffrey French, London

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