Hedge funds will receive significant inflows over the next 12 months, particularly from funds of hedge funds (FoHFs) such as Permal and private and public pension funds, says a survey.
Almost a third (32%) of 2,700 investors surveyed by research company Preqin plan to allocate additional capital to hedge funds before July next year.
This could bring a net inflow of $195 billion into hedge funds, significantly boosting the assets under management (AUM) of the global hedge fund industry, currently estimated at $2 trillion.
According to Preqin, FoHFs are driving this surge in hedge fund investment. Established FoHFs are developing new strategies to attract capital. Over half (54%) of FoHFs surveyed by Preqin said they expect to make new hedge fund investments.
Permal, a FoHF with $23 billion AUM, could be adding as many as 25 new managers to its portfolios by 2012, the report said.
Other key sources of hedge fund investment include sovereign wealth funds (SWFs). Around 39% of the SWFs surveyed plan to make new hedge fund investments while public sector pension funds (36%) and private sector pension funds (24%) are also expected to increase allocations to the industry.
Allocations by pension funds to hedge funds have risen from 3.6% in 2007 to 6.6% of total investments, according to the report.
Well over half (67%) of private sector pension funds are accessing hedge funds through FoHFs with 57% of public sector pension funds using the same route.
Family offices, the early investors into hedge funds, now have the least interest in these investments, with just 17% saying they will make new allocations over the next 12 months, stated the report.
The majority of investors increasing allocations to hedge funds are based in the US (51%), followed by Europe (39%) and Asia (3%).
The vast majority of investors surveyed (87%) said they were considering equity long/short strategies. An example of this is Clariden Leu, a Zurich-based FoHF, which is seeking equity long/short managers as part of its plans to allocate $30 million to 10 managers by next year.
Macro hedge funds were the second most popular with 64% of investors considering this strategy.
However, managers of unique or uncommon strategies are also gaining in favour with 58% of investors claiming they operate an open door policy with such funds and consider all strategies on an opportunistic basis.
Under half (47%) of the investors surveyed, particularly those new to hedge fund investment, said they wanted to access these alternatives via FoHFs.
This contradicts a Citi Prime finance report published earlier in July showing institutional allocations to FoHFs have fallen from 45% to just 33%. Direct investments into hedge funds currently account for 66% of institutional investment compared with 55% in 2006, Citi's report said.
