Over the same period, the proportion of European investors with exposure to the asset class increased from 21 per cent to 35 per cent, while in North America demand rose from 23 per cent to 27 per cent. The highest percentage of hedge fund users was recorded in Japan, where 59 per cent of institutions use these investment vehicles – up from 41 per cent in 2003.
Funds of funds have become the vehicles of choice for hedge fund investing, with around 75 per cent of European hedge fund investors selecting these products.
Expected strong performance in private equity is also resulting in larger allocations to the asset class. According to Peter Laib, managing director of private equity firm Adveq, the next few years will see more investors going into private equity with average allocations rising accordingly. Adveq has sponsored a series of studies on the use of private equity by institutional investors in different European countries including Germany, Switzerland, the Nordic region and most recently the Netherlands.
The Dutch study, conducted by the University of Tilburg in the Netherlands, shows how almost a third of institutional investors in the country are now investing in private equity. Regulatory changes, in particular the implementation of the Financieel Toetsingskader (FTK) next year, are seen as key factors fuelling increased institutional money flows into private equity. Exposure to the asset class by Dutch institutional investors currently stands at 3.8 per cent, but it is expected to go up to 4.2 per cent over the next two to five years.
“What we have discovered is that return expectations on private equity are high, in the range of 10 to 12 per cent,” Mr Laib said.
“Investors expect a significantly higher return in private equity compared to public equity. These days we are seeing pretty attractive returns generated from transactions on the venture side.”
Mr Laib explained that this situation is being boosted by the low interest rate environment which makes re-capitalisation of companies easier resulting in greater potential for attractive investment returns.
“Investors have rather disappointing return expectations on traditional assets and in order to be competitive, both pension funds and insurance companies, need higher returns, so they are looking at every alternative,” he said.
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