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Beyond 60-40: The evolving role of hedge funds in institutional investor portfolios

Global investor survey finds that institutional investors are increasingly moving away from the traditional 60% equities/40% bonds portfolio structure and using hedge funds to customise their portfolios

 

The evolving role of hedge funds in institutional investor portfolios was the theme of ‘Beyond 60/40’, commissioned in 2013 by the AIMA Investor Steering Committee.

Institutional investors have been the main source of the industry’s asset growth since the crisis. But why has so much money flowed into the industry at a time of relatively modest returns for many hedge funds? This paper, by the members of AIMA’s Investor Steering Committee (ISC), set out to answer this broad question.

It was the product of a survey of many leading institutional investors in hedge funds worldwide. The respondents included North American, Asian and European pension funds, endowments, foundations and family offices, regarded as among the most influential institutional investors in hedge funds, with combined assets of more than $400 billion. They were asked a series of questions about their hedge fund investments, including the size of their allocations and the role that hedge funds play in their portfolios.

They were questioned about the processes that they follow in making those allocations, including their due diligence and risk management requirements. And they were invited to suggest changes that the industry could make to encourage further increases in allocations.

The paper’s key finding was that institutional investors are moving away from the traditional 60% equities/40% bonds portfolio structure and increasingly using alternatives in general and hedge funds in particular as tools to customise their portfolios.

The investors said they were using hedge funds to meet individual objectives in terms of risk-adjusted returns, diversification, lower correlations, lower volatility and downside protection. The paper found that hedge funds are increasingly regarded as a means to access opportunities and tailor portfolios, rather than as a separate asset class.

The survey also found that most investor-respondents had increased their allocations to hedge funds since the financial crisis, with most planning to continue to increase the size of their investments in subsequent years.

Hedge fund due diligence was found to be taking longer. The increasing emphasis placed by hedge funds on transparency since the crisis was generally welcomed, although some investors cautioned that they did not want to be swamped with unnecessary information.

Many investors welcomed the increased regulation of the hedge fund industry, but some expressed concern that the reforms could be onerous or restrict their ability to allocate to managers in certain jurisdictions. 

In addition, many of the respondents said they would like hedge funds to take fewer investors and build stronger strategic partnerships with them in future – a theme which we went on to explore in The Extra Mile.

AIMA Beyond 60 40

“The paper sets out to explain why traditional portfolio construction techniques have been revisited by many investors since the crisis and what some of the new thinking in that space involves, including the role of alternatives in general and hedge funds in particular in the portfolios of tomorrow”

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