Investors in hedge funds have earned a combined $1.5 trillion after fees in the last 10 years, despite $306 billion of performance losses related to the 2008 financial crisis.
New research published by the Alternative Investment Management Association and the CAIA Association — an alternative investment education institution — also found that about one in every four dollars managed by the global hedge fund industry is invested by public and private pension funds. That equates to more than $700 billion.
In the U.K., more than half of all defined benefit funds allocate to hedge funds or to other alpha-seeking strategies, the research said.
In the first of a series of papers to be published between now and early 2016, AIMA and CAIA said institutional investors as a whole invest about three in every four dollars managed by hedge funds, equating to more than $2 trillion.
The paper also looked at the reasons for hedge fund investment. Citing research from data provider Preqin, the paper said the top five factors for investment were uncorrelated returns, risk-adjusted returns, producing absolute returns in all markets, dampening portfolio volatility and providing diversification.
“The global hedge funds industry has grown at approximately 10% a year since the financial crisis, and much of this growth can be attributed to increased allocations from public and private pensions,” said Jack Inglis, CEO at AIMA, in a statement accompanying the paper.
Mr. Inglis said that, despite hedge funds moving into the mainstream in terms of investment, trustees are asking questions about existing and prospective allocations. “Rarely has there been such demand for a realistic assessment of the benefits — and also the risks — associated with hedge fund investing,” he said.
The paper, “The Way Ahead: Helping trustees navigate the hedge fund sector,” also looks at key considerations for trustees, including fees and arrangements such as side pockets and gates.
The research is available on AIMA's website.