1. Global Pension & Sovereign Wealth Fund Investment in Hedge Funds: The Growth & Impact of Direct Investing
Overview of Key Findings
November 2011

2. Survey Overview
The 2011 Survey focused on pension & sovereign wealth funds that directly allocate to hedge fund managers & on hedge funds receiving such allocations
We interviewed the individual responsible for hedge fund allocations from 24 public & private pension funds and sovereign wealth funds, ~$1.7 trillion of assets (~5% of global total)
We additionally interviewed the chief marketing officer &/or the COO from 31 hedge funds managing pension and sovereign wealth fund money representing assets of ~$186 billion (7% of industry)
Interviews were done globally across the Americas, EMEA & APAC

3. Hedge Fund Industry Assets by Type
Rising Institutional Influence
Institutional investors overall, and pension and sovereign wealth fund investors in particular, have become the dominant share of hedge fund industry assets, particularly post-2008
Institutional investors now represent 52% of global hedge fund industry AUM
Of this total, our analysis shows that pension funds now account for $594 billion of investment in hedge funds – 53.5% of the institutional total
Sovereign wealth fund investment has risen to $220 billion, 19.8% of the institutional total
Hedge Fund Industry Assets by Type
$1.1 T
$990 B
$878 B
HNW, Family Office & Other Allocations
$806 B
Billions of U.S. Dollars
$500 B
Institutional Allocations (Foundations & Endowments, Pension Funds & Sovereign Wealth Funds)
$125 B
Sources: Citi Prime Finance Analysis based on HFR Q Global Data , McKinsey & Company, Prequin & Greenwich Associates data

4. Types of Allocations Being Made to Hedge Funds
Shift to Direct Investing
Early institutional allocations were channeled to hedge funds via fund-of-funds, but by the mid-2000s, this approach shifted with the financial crisis accelerating the trend to direct investing
Types of Allocations Being Made to Hedge Funds
As investors’ comfort with hedge funds increased, the economics of the fund-of-fund model prompted many larger organizations to develop their own ability to allocate
Liquidity problems uncovered with the fund-of-fund model in the crisis period accelerated this trend
Source: Citi Prime Finance Analysis based on HFR Q Global Data

5. Profile of Direct Allocator Portfolios
Smaller, More Targeted Portfolios
Direct investors are building small, targeted portfolios that seek to provide resiliency across rather than “time” market cycles—earning them a reputation as offering “sticky money”
Profile of Direct Allocator Portfolios
Most of the pension and sovereign wealth fund investors contacted for the survey had small teams of only one to five individuals focused on their hedge fund allocations
This constrained their ability to evaluate broad numbers of managers and increased their reliance on consultants as intermediaries to help them navigate the hedge fund space
Extensive time is put into considering the right portfolio mix and very few allocations are done in any given year
Interviewees stressed the importance of their “relationship” with managers in their portfolio.
Source: Citi Prime Finance Analysis based on primary research

6. Institutional Qualifications Pre & Post 2008
Expanded Institutional Threshold
Fewer factors mattered in determining institutional quality pre-2008, but since the crisis, the footprint a manager must offer to address investor requirements has expanded dramatically
Institutional Qualifications Pre & Post 2008
From 2001 to 2007, the number of hedge funds nearly doubled
In this environment, a manager’s pedigree was seen as a key measure in understanding what to expect in terms of returns
Post-2008, capacity is not seen as constrained. Investors are demanding more. Non-financial performance of the fund now weighs equally with returns
Pre
Source: Citi Prime Finance Analysis based on primary research

7. Industry Bifurcation Toward $5.0 Billion
Bifurcation of Larger Managers
Direct investors noted a bifurcation in the industry toward the AUM $5.0 billion threshold as managers split in terms of their appetite to continue building their pool of assets
Industry Bifurcation Toward $5.0 Billion
Largest managers with AUM toward & above $10 billion are favored by newer pension and sovereign wealth fund entrants
More experienced direct allocators expressed concern that many of these largest managers are constrained in their ability to deploy capital—the size of their positions force them to rely on just 2-3 “big bets” or causes them to correlate too highly to beta
Another category of managers limit their AUM & close their fund as they near $5.0 billion—citing concerns about “strategy saturation”, comfort with a more entrepreneurial management culture & satisfaction with the economic model
Source: Citi Prime Finance Analysis based on primary research