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Alternative Market Briefing

Institutional investors open to investing in smaller hedge funds, even if they still mainly invest in large ones

Thursday, October 01, 2015

Benedicte Gravrand, Opalesque Geneva for New Managers:

Preqin, a research provider, has interviewed around 300 hedge fund managers and looked into its fund size benchmark to gauge the effect of fund size on the overall industry.

To start with, institutional investors, even if most are open to investing in small and medium-sized hedge funds, tend to allocate to large hedge funds anyway. 66% of capital in the industry today (estimated at a total of $3.1tln) is sourced from institutional investors, and 82% of that capital is in funds that have at least $1bn in assets under management (AuM). Of these investors, only 11% will exclusively invest in large funds; 22% will consider investing in funds with less than $100m; and 52% have a minimum requirement that lies between $101m and $499m.

Currently, 7% of institutional investors invest in medium sized funds ($500-999m), 9% in small funds ($100-499m) and 2% in emerging funds (less than $100m). Private wealth organizations or institutions that have larger or more sophisticated hedge fund portfolios are most likely to invest in smaller funds, Preqin adds.

When looking at returns on a risk-adjusted basis, large funds have produced the highest three-year annualized return (as of 30 June 2015) with the lowest volatility. Emerg......................

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