GLOBAL - Pension funds have almost doubled their average allocations to hedge funds since the financial crisis began, research by Preqin found.
The average private pension scheme boosted holdings in hedge funds from 5% in 2007 to 9% now, while public schemes grew their allocation from 4% to 7%, a survey of about 2,300 institutional investors conducted last quarter by Preqin found.
Hedge funds had their best year in a decade in 2009, making 20% for investors, after losses of 19% in 2008 marked their worst year since at least 1990.
The researchers said public pensions now represent 15.9% of hedge fund industry assets, while private schemes represent 13.8%. Sovereign wealth funds contribute a further 1%.
Don Steinbrugge, managing partner at US-based consulting and third party marketing firm Agecroft Partners, said: "The market declines of 2008 have been a catalyst for pension funds to speed up these allocations, because most investment committees do not want to experience the significant market declines large allocations to long-only managers can generate.
"When pension funds determine their asset allocation by assigning return, risk and correlation estimates to the various assets classes they plan to allocate capital to, hedge funds look very favorable compared to other asset classes."
The very different rates of return demanded by various groups of allocators suggest hedge funds trying to please numerous investor types face an uphill task, however.
Private and public pension schemes expect 9% and 6% respectively from their hedge funds, while family offices require 13%.
Pension schemes' expectations were met by hedge funds making 12.3% net annual returns since 1990, according to data providers Hedge Fund Research, though over the past decade that fell to 6.5%.
Schemes using funds of hedge funds to invest were also satisfied, more or less, by an average 8.3% annual return from funds of funds since 1990, but not by the average 4% return since 2000.
Preqin said: "As they grow in experience public pension funds are continuing their shift into direct investment."
Agecroft's Steinbrugge added: "Most pension funds' allocations to hedge funds follow an evolution that consists of making an initial allocation through a fund of funds. Once they get comfortable with the asset class, they begin to go directly by investing in the large brand name hedge funds. Then, a few years later after they have achieved a high level of sophistication, they focus more on hiring mid-size alpha generators."
Some 18% of public scheme allocators now allocate only to single manager funds, up from 14% last year. For private schemes, the proportion grew from 13% to 20%. However, roughly half of each group allocate via funds of funds.
Preqin added: "Newer pension funds are still using funds of funds to gain their footing in a complicated asset class."
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