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

The AIMA Investor Steering Committee (ISC), a committee of institutional investors that undertakes educational initiatives and provides practical guidance within AIMA, the global hedge fund industry association, has published a new paper on the evolving role of hedge funds in institutional investor portfolios.

The paper, ‘Beyond 60/40: The evolving role of hedge funds in institutional investor portfolios’, is based on a survey of some of the most important institutional investors in hedge funds globally. The respondents included North American, Asian and European pension funds, endowments, foundations and family offices. Their combined assets are more than US$400 billion.

The main findings include:

  • 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.
  • Investors are using hedge funds to enable them to meet individual objectives in terms of risk-adjusted returns, diversification, lower correlations, lower volatility and downside protection.
  • Hedge funds are increasingly regarded as a means to access opportunities and tailor portfolios, rather than as a separate asset class.
  • Most investor-respondents have increased their allocations to hedge funds since the financial crisis, with most planning to continue to increase the size of their investments in the next few years.
  • Hedge fund due diligence is taking longer, with investors saying it can take up to two years to complete.
  • The increasing emphasis placed by hedge funds on transparency since the crisis is generally welcomed, but 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.
  • The respondents said they would like hedge funds to take fewer investors and build stronger strategic partnerships with them in future.
  • Asked what steps the hedge fund industry could take to attract new or increased investments, the investors cited lower fees, further transparency, additional improvements to governance and further improvements to operational infrastructure.

Michelle McGregor-Smith, a member of the AIMA ISC, who wrote the foreword to the paper, said: “Institutional investors are now the biggest source of assets for the hedge fund industry globally and allocations continue to grow. Many people have questioned this and asked what value hedge funds can provide. We have set out to answer this by explaining the role that hedge funds can play in our portfolios.

“What our paper shows is hedge funds are increasingly regarded as tools that enable investors to customise their portfolios and achieve individual objectives in terms of risk-adjusted returns, lower correlations, lower volatility, greater diversification and more downside protection. We also stress the amount of due diligence that institutional investors undertake before they allocate. These investment decisions are not taken lightly.”

Ms McGregor-Smith concluded: “I would like to express our gratitude on behalf of the ISC to the investors we surveyed for devoting so much of their time to this initiative. I would also like to thank AIMA for their continued commitment to investor engagement on behalf of the global hedge fund industry.”

Andrew Baker, AIMA CEO, said: “AIMA has supported and provided publications related to a wide variety of educational guides for investors and sound industry practices throughout its 23-year history. We hope that this paper, authored by some of the most important investors in hedge funds globally, will be a useful reference guide to both hedge fund managers and investors in hedge funds.”

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