New Sweet Spot

Chidem Kurdas

A survey of institutions and hedge funds by Citi Prime Finance challenges the perception that investors prefer the largest funds—an impression that became received wisdom after the 2008 crisis.

Pensions and sovereign wealth funds do want managers they invest with to have assets of some size, especially as they’re increasingly making large direct allocations instead of going the fund of funds route.  According to the Citi report, direct allocations rose from 55% to 66% of institutional investments and correspondingly fund-of-fund investments fell from 45% to only 33% of the industry since 2006.

But while they primarily invest with over-$1 billion managers, institutions do not necessarily go for the very largest. A private pension executive is quoted as saying: “I see an opportunity for more mid-sized managers in the $2 to $5 billion range. There are opportunities in that range that allow those managers to move assets around and really put money to work.”

In other words, below-$5 billion managers are seen as more nimble than larger managers. The issue of nimbleness used to be a major concern during the years before the crisis, as hedge fund assets grew fast. Big firms, like Paulson & Co. with around $35 billion, diversify their strategies.

After 2008, with assets drastically down and security the top issue for investors, the largest managers received most of inflow.  But now with assets back up, managers’ ability to move quickly in and out of trade positions may have come to the fore again.

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