Executive summary - Udo Bullmann

1.3. Who invests in hedge funds? - the newcomersWhere does this money come from? In relative terms, investments by very wealthyindividuals still retain a dominant position, making up 44% of hedge funds’ AUM in 2005.Yet, since 1996 the relative weight of capital committed to HFs by individuals has decreasedby approximately one third, from 62% to 44%. In the same period direct investments in theindustry by institutional investors (pension funds, insurance, corporation and endowments)has grown by 26%. This means that by 2005 institutional investors had invested somewherebetween $ 210 and 280 bn. in hedge funds.The most significant change in both real and relative terms has been the impressivedevelopment of FOHFs. Their weight has almost doubled in a decade.. Thus, by 2005 FOFHscontrolled almost one third of AUM, i.e. $ 240-330 bn. The nature of capital gathered byFOHFs is not easy to estimate given the lack of specific surveys. Nevertheless, the prevailingopinion is that small and medium-sized institutional investors - mainly pension funds andinsurance - are among the main subscribers to these funds.Global hedge funds by sources of capital7%1996 200510%7%7%5%44%12%62%16%30%IndividualsFunds of fundsPension fundsCorporation andinstitutionsEndowments andfoundationsSource: Hennessee Group LLC, IFSL estimatesIn combination, the figures on institutional investments and FOFHs are likely to reflect agrowing readiness among institutional investors to consider non-traditional strategies ofinvestments, using derivatives and leverage in order to achieve their investment targets. Astudy by State Street HF Research Study confirms this view. Thus, it finds that one-third ofinstitutional investors surveyed in 2004 had at least 10% of their portfolios in hedge funds,while half intend to have 10% or more invested by 2007.13