NEW YORK -- Pension plan sponsors and endowment funds are taking a larger share of a growing pool of U.S. hedge fund assets, a recent survey shows.
Pension funds' share of assets managed by hedge fund managers grew slightly to 11%, on average, from 10% the previous year, according to data from a survey conducted by the Hennessee Group LLC.
Endowment assets climbed to become 9% of hedge fund assets, on average, from 7% the previous year.
While tax-exempt institutions still are a relatively small part of the hedge fund investor base, they are grabbing a larger share of an asset base that is growing explosively, Hennessee executives estimate.
Using survey data and its own hedge fund indexes, Hennessee calculates that as of January, U.S. hedge fund assets grew 54% to $210 billion compared with a year earlier.
The growth in assets is coming across all of the investment styles tracked by Hennessee. E. Lee Hennessee, managing principal, said that even categories that have been performing poorly, such as short sellers, are still getting new capital.
Hennessee executives estimate 18 percentage points of the growth came from market performance and 36 points came from new capital. Calculated separately, Hennessee's Hedge Fund index returned 19.8% in 1997 gross of fees.
Manager styles with the highest pension investment are distressed security, market neutral, international and arbitrage styles, the survey data show.
Pension assets comprised about 30% of distressed securities manager assets, 27% of market neutral manager assets, 17% of international equity managers, and 16% of arbitrage manager assets.
But with the growth of assets comes some recognition by hedge fund managers that they have a limit as to how much money they can manage.
On average, all hedge fund managers in the survey said they have reached 53% of their available investment capacity, leaving the door open to about another $90 billion to $100 billion, Hennessee estimates.
But there is less room among some of the managers most popular with pension plan sponsors.
Distressed managers and international managers in the survey were on average around 70% of capacity, while market neutral managers were around 60% capacity, on average. Arbitrage managers were about 50% full.
The macro-style managers say they have reached about 90% of their capacity.
Ms. Hennessee said limited capacity for hedge fund managers now doesn't mean they won't be able to expand in the future.
"They go through different time periods were they want to shrink and where they want to expand," Ms. Hennessee said.
They won't want to let assets grow faster than they can handle them, she said. As they add expertise through additional personnel, or as market conditions change, their available capacity will expand, she said.
Changes in federal law that allow types of hedge funds to have an unlimited amount of qualified investors could expand the hedge fund offerings available to institutions.
More managers are taking a look at either converting their existing fund to one that allows unlimited qualified investors, or opening up a new fund, she said. Forty-three percent of those surveyed intend to take advantage of the new law in 1998, compared with 15% in the previous year's survey.
Hennessee surveyed 148 management firms with 306 hedge funds totaling $90 billion in assets.
The interviews took place between Jan. 2 and Jan. 30, and the survey did not include fund-of-funds.