Individual hedge fund managers benefited from diminishing allocations to hedge fund-offunds (hedge FoF) from the superannuation sector, the 2010 AIMA Australia/UNSW survey of superannuation fund investment in hedge funds shows. The number of super funds allocating to hedge FoFs fell from 60 per cent in 2008 to 38 per cent in 2010, while the number of super funds investing in individual managers leapt from 22 per cent to 38 per cent in the same timeframe. John Evans, who as finance professor at UNSW ran the survey, said the swing in allocations was most likely driven by increasing internal investment expertise within many large super funds, enabling them to perform due diligence on individual managers and bypass hedge FoFs.

The survey also indicated this preference of individual managers would not be short-lived: respondents expected to lift their allocations to individual funds to more than 65 per cent by 2012, and let hedge FoF investments fall to about 7 per cent, while exposure to multi-strategy funds would remain roughly flat at 10 per cent. More than 40 funds managing in excess of $100 billion in assets, and of which 80 per cent had existing investments in hedge funds, answered the survey. Overall, the research found that hedge fund allocations increased from 2.5 per cent of overall portfolios in 2008 to 3 per cent in 2010. The financial crisis made little impact on hedge fund appetite:

43 per cent of respondents said they would decrease allocations, while 36 per cent said they would increase and 21 per cent said their hedge fund programs were unaffected. Another dominant trend was that funds greatly preferred US managers, which netted 78 per cent of the respondents’ investments, followed by Australian managers with 20 per cent and UK and European shops with 2 per cent. None invested in Asian managers. They also favoured global strategies, which accounted for 52 per cent of allocations, followed by US exposures with 32 percent and Australian- and European-focused strategies with 10 per cent and 6 per cent respectively. “The big play, clearly, is to use US managers to do global strategies,” Evans said.

And most of the respondents – 92 per cent – favoured managers that were part of large financial institutions. The most attractive strategies were distressed debt, long/short equity and emerging markets, and the most valued attributes in managers were competency and operational experience, while the biggest obstacle to investment, unsurprisingly, was fear of illiquidity stress. Most respondents – 55 per cent – invested between 2per cent to 5 per cent in hedge funds, and funds overseeing between $1 billion to $5 billion were best represented, accounting for 36 per cent of respondents, followed by funds managing more than $10 billion, at 29 per cent.

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