Pension Direct Investing Drives Industry

Growth in the third quarter was brisk, bringing up total hedge fund assets to about $2.5 trillion at the end of September, according to Hedge Fund Research. This despite – or perhaps because of – the political risks emanating from Washington.

Today’s asset flows differ from the pre-crisis era in that the money does not come via funds of funds; if anything the latter continue to shrink. In large part it is coming directly from pensions. And since pensions tend to deal with big entities, the money is going primarily to the largest managers.

Thus one beneficiary of the growth, Och-Ziff Capital, says direct allocations from pensions continue to be the largest driver of the inflows while withdrawals from funds of funds were the largest driver of outflows.

In 2012 the same pattern was notable but this year the net inflow is significantly larger. Net $53 billion came in during the first nine months, more than the industry received for the entire year in 2012.

The Och-Ziff people see favorable prospects: “We remain confident that capital allocations to hedge funds will increase as institutional investors further seek to mitigate risk and enhance the returns of their equity and fixed income portfolios.”

Likely those institutions will continue to invest directly with the big firms. Meanwhile raising new capital remains tough even for established mid-sized managers.

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