Large institutional investors to increase allocations to smaller funds in hunt for alpha

Hedge Fund Alert, one of the leading publications covering the hedge fund investment industry, have published an interesting article which discusses the results of their annual industry outlook survey. The article says that the consensus among 20 participants in their survey was that large institutional investors, such as pension funds, endowments and insurers, are becoming dissatisfied with the weak returns from some larger blue-chip fund managers and will increasingly look to deploy capital to smaller funds capable of achieving greater returns and alpha.

The search for alpha involves investors looking for returns which outperform the wider market and which are uncorrelated with wider financial market performance. It’s believed that many institutional investors who already invest in alternatives will look to smaller, niche fund managers to help them achieve better performance from this section of their portfolio, and this could lead to larger commitments flowing into these types of funds.

Interestingly the survey also discovered that there is an expectation that some investors will become more selective in the strategies they commit too. They expect this to increase the interest in asset classes which bear little correlation to traditional asset classes. Hedge Fund Alert suggest that one of the beneficiaries of this increased demand for uncorrelated returns could be catastrophe bonds.

This is a positive piece of market intelligence for the insurance-linked securities, catastrophe bond and reinsurance-linked investment fund managers as it suggests that they may find larger investors knocking on their doors looking for ways to put capital to work in these markets. With interest in ILS and cat bond from investors already high, additional capital inflows into the sector could help to stimulate issuance further as well, something that would be needed to satisfy the demands of these large institutional investors.