US institutional interest in hedge funds is increasing, but allocations are not large. Last year, just $1 dollar in every $100 invested by over a thousand corporate and public pension plans and endowments and foundations surveyed by Greenwich Associates went into hedge funds.
The total invested amounts to only $50 billion. Although this is up from 0.6 per cent in 2001 ($30 billion), it is still piffling even by comparison even with private equity – where Greenwich found two in five funds invested, and allocations worth $157 billion and 5.1 per cent of total assets.
Greenwich warns that funds may be under-estimating the costs and risks of hedge fund investing, especially as they may be buying at the top of a boom. But the firm found appetites vary, with foundations and endowments investing more in hedge funds and private equity than pension plans of both types.
The findings are included in the 2002 US asset allocation survey by Greenwich Associates. It also noted, more predictably, that allocations to US domestic equity fell sharply last year to less than half of total assets (46.8 per cent), while fixed income investments climbed to more than a quarter (to 27.8 per cent of total assets) and international equity holdings stabilised (at 11.2 per cent). The balance was invested in guaranteed investment contracts (3.8 per cent), real estate (3.4 per cent), private equity (3.1 per cent), and hedge funds (1.0 per cent).
However, hedge fund investment can be expected to increase, if only because one reason foundations and endowments lost less money in 2002 than corporate and public pension funds was their higher allocation to absolute return strategies Their assets dipped only 6.3 percent to $206 billion in 2002, against double digit percentage falls experienced by corporate and public sector pension plans. A fifth of all the plans surveyed by Greenwich are now using hedge funds in their portfolios, the study showed, up from 15 per cent in 2001.
Greenwich interviewed 574 corporate funds, 246 public funds, and 212 endowments or foundations in the United States between August and October last year.