Institutional investors continued to slow the pace of new hedge fund investments in 2017, while simultaneously reducing redemptions from existing managers.
Combined investment in hedge funds and hedge funds of funds was down about $1.4 billion, to $9.8 billion, or 12.1% below 2016 inflows, showed analysis of the investment activity of asset owners as reported by Pensions & Investments throughout the year.
Hedge fund inflows declined 2.1% in 2017 to $8.7 billion, while investment in funds of funds fell 51.5% to $1.1 billion.
In a near reversal of the prior year's trend, combined redemptions from hedge funds and hedge funds of funds were down 86.7% to $1.4 billion in 2017. In 2016, total redemptions were up 81.6% to $10.3 billion.
"Redemptions seem to have slowed down. The theme this year was more about … upgrading and optimizing the portfolio. This is especially true in the context of market performance and how extended the bull run has been," said Victoria Vodolazschi, senior investment consultant-hedge fund research, based in the New York office of Willis Towers Watson PLC.
"In terms of flows, investors generally were not planning to abandon their allocations and actually planned net increases in 2017," Ms. Vodolazschi added.
P&I's analysis of institutional investor hedge fund activity found general trends including:
- increases in total hedge fund exposure by large, sophisticated investors;
- manager upgrades within existing hedge fund portfolios; and
- more portfolio restructuring to eliminate separate hedge fund allocations and move hedge funds into appropriate asset class portfolios.
The biggest hedge fund investor this year by far was the State of Wisconsin Investment Board, Madison, which accounted for 32% of total hedge fund investments in P&I's analysis.
SWIB, which oversees a total of $115.8 billion in assets, including the Wisconsin Retirement System's $105.5 billion, invested a total of $2.8 billion through 20 transactions with 14 hedge fund managers includingTwo Sigma Investments LLC, D.E. Shaw Investment Management LLC, Marshall Wace LLP and Efficient Capital Management LLC.
The $13.9 billion Maine Public Employees Retirement System, Augusta, was another big player in 2017, awarding $300 million each to two alternative-risk premium hedge funds, as was the $14 billion Los Angeles Water & Power Employees' Retirement Plan which handed Blackstone Alternative Asset Management the year's largest hedge fund-of-funds mandate at $580 million.
Rounding out the list of 2017's five most active hedge fund investors are the $54.1 billion Pennsylvania Public School Employees' Retirement System, Harrisburg, which invested a total of $550 million in two hedge funds; and the $28.6 billion Texas County & District Retirement System, Austin, $495 million to seven hedge funds.
In September, the $23.7 billion City & County of San Francisco Employees' Retirement System increased its allocation to hedge funds to 15% of plan assets from 5%. As part of a quick, one-year boost, the plan is on track to invest an additional $2.5 billion in hedge funds to bring assets to $3.15 billion by the end of October 2018 (Pensions & Investments, Oct. 10).
San Francisco is using a hybrid approach to expanding its hedge fund portfolio: ultimately, 65% of the portfolio will be managed in a customized fund-of-funds portfolio by Blackstone Alternative Asset Management, with the balance directly invested in individual hedge funds.
The plan invested a total of $350 million in five hedge funds in 2017.