Institutional investors on the way to the hedge fund market: why now, and why it is not certain to pay off

In recent months, institutional entities have begun a race to increase their activity in the hedge fund market. IBI acquired the Plutus fund for 15 million shekels at a valuation of 30 million shekels, Meitav bought the Trio fund for 30 million shekels, Harel is acquiring the Tulip fund for 30 million shekels, and Phoenix is also checking its entry into the field. The hedge fund market in Israel manages about 100 billion shekels and includes hundreds of funds that are roughly divided into dozens of small funds managing tens of millions of shekels, a small number of medium-sized funds managing hundreds of millions of shekels, and individual funds managing several billion shekels. Institutional investors, for their part, have identified the opportunity to acquire or invest in small and medium-sized hedge funds for a few tens of millions of shekels, which is considered small change for institutional investors managing assets worth hundreds of billions of shekels. Why is it so important for institutional investors to penetrate a market that is relatively secondary to their ongoing operations, and why now? Hedge funds manage wealth for only a few of the qualified population in Israel. There is already a significant investment that connects the world of hedging to the public of savers, following the establishment of hedge funds in trust. This is an industry that already manages 5 billion shekels and is open to the general public. Hedge funds in trust are managed freely like hedge funds, but they are under a known and supervised regulatory structure, subject to the Joint Investment Trust Law and the supervision of the Israel Securities Authority.

"Institutional entities are already in the world of hedge funds, but in recent years there has been an increase in demand, and especially demand for a wider variety of strategies," says Dave Lubetzky, CEO of the IBI investment house and its controlling shareholder. "Historically, this market was very fragmented: a small team specializing in options, another in foreign bonds, another in value strategies. Today we see more clients joining several funds simultaneously, and therefore there is great logic in an investment house as an institutional body being able to offer the client several products under the same roof. This increases the chance of reaching the client and also allows building a broader relationship with him."

Not an exit, but creating a distribution system

IBI invested 15 million shekels in the Plutus hedge fund. According to Lubetzky, the amount of the transactions at this stage is not the main element in them. According to him, "in most cases, this is not a classic exit deal. The manager does not sell and go home, but connects to the investment house's platform. From his point of view, the real upside is the ability to increase the fund several times over through the distribution system and the customers of the large entity. Therefore, the story is less about how much money was paid in the deal, and more about the partnership between an investment manager and a large distribution engine."

"Most hedge fund managers are investment people. Many of them came from investment houses or institutional entities, but they are not marketing people, not service people, and not operational people. When you have 30 clients, you can answer them all from the phone. When you have 100 clients, you suddenly spend the whole day on questions, service, and reports instead of managing investments. A small entity does not maintain a risk management department, customer relations, sales, and marketing like a large investment house. In the end, there are a few analysts and a few investment managers there who want to do what they know how to do - invest."

"Investment houses and institutional entities have a huge advantage in marketing and distribution. They have customer relations systems, a brand, risk management systems, and an existing customer base. The public also feels, and to a large extent rightly so, more comfortable buying such a product from a large entity that it knows. In contrast, many independent hedge funds start on the basis of family and friends and personal contact, but when they reach a certain volume they encounter a glass ceiling. At this stage, you already need a whole system around the investment manager."

"Payment of 10% on managed assets"

Matan Pasternak, CEO of the VAR investment house, which manages hedge funds totaling more than a billion shekels, explains that the amounts may seem small, but according to him, "it seems that institutional investors are willing to pay 10% on the volume of assets managed by the fund (a fairly high multiplier in the financial market). Therefore, they focus on acquiring small funds that manage up to half a billion shekels. But the moment will come when institutional investors will also acquire larger hedge fund entities and then there will be more significant deals. This is the trend in the world."

Asset managers in the world do indeed manage wealth management platforms through which management rights in hedge funds are also acquired, such as Goldman Sachs, which invested in 54 asset management companies. Pasternak notes that throughout 2025, thanks to the boom in the markets and the success fees they collected, some hedge fund managers pocketed hundreds of millions of shekels - a figure that pushed institutional investors to accelerate their entry into the industry. There is also an internal incentive for this. "If an institutional entity sets up a hedge fund company, it can keep its outstanding investment managers in-house, because it will be able to pay them a higher salary than the senior salary, which is limited in the financial industry to 3.5 million shekels per year," explains Pasternak. That is, managing a hedge fund within an institutional entity can serve the institutional entity as a means of retaining outstanding managers and bypassing the senior salary law.

However, not all institutional entities share the enthusiasm for expanding activity in the hedge fund industry, which is considered part of the non-tradable investment field. The most prominent of these is Yelin Lapidot, which for years has taken an unusual position in the industry and argues for a built-in preference for investing only in the tradable field, i.e., stocks and bonds. The central argument of the controlling shareholder Yair Lapidot is the mismatch between non-liquid assets and savings products, such as hedge funds in trust, where the member can transfer or withdraw his money in a way that may force the investment manager to deal with liquidity needs precisely during a crisis. That is, in Lapidot's view, in alternative assets during a crisis, clients ask to leave hedge funds and the need to return their money forces managers to sell investments cheaply and thereby harm those who remain in the fund. That is, those remaining in the fund finance those who asked to leave.

Liquidity problem combined with periodic valuation of assets

Furthermore, in Lapidot's view, tradable assets are priced daily in the market, while private assets and alternative funds are partly based on periodic valuations. Therefore, in a period of sharp declines in the markets, they may show lower volatility, also because the decline in value comes with a delay. This phenomenon was prominent in 2022, which was characterized by declines in the markets. At that time, funds with a high rate of non-tradable investments went through the year of declines relatively well, but with the recovery of the markets in 2023, some of the non-tradable assets underwent revaluations in their price downwards - precisely at a time when tradable assets rose.

This approach puts a question mark over the current race. A hedge fund is indeed considered a non-tradable product, but it is different from a private equity or non-tradable real estate investment, sometimes a large part of its assets is completely tradable. However, it also offers the investor a complex and expensive product, which may include liquidity restrictions and success fees. The question that remains open: is the acquisition of hedge funds a correct structural expansion of the institutional investors' product basket, or after years of success are they simply willing to pay dearly for an asset whose future profit expectation is much lower than the price reflects?