Sentiment overall is positive for hedge fund industry growth with investors forecasting a 3.5 per cent increase in AuM during 2016, according to the 8th Annual Credit Suisse Hedge Fund Investor Survey.
If accurate, this projection would push industry assets over USD3 trillion with an upper quartile forecast for USD3.2 trillion by year end.
Some 87 per cent of investors indicated that they would maintain or increase their hedge fund allocations in the coming year. Within that universe, insurance companies identified themselves as being most underweight hedge funds (compared to institutional peers), which could allow for further growth.
Equity Market Neutral-Fundamental was forecast by investors to be the most preferred strategy for 2016 with 34 per cent net demand. This represents a move up from the No5 ranked strategy in our 2015 survey. Equity Market Neutral-Quantitative was the second most preferred strategy with 30 per cent net demand (also improving from last year when it was ranked 7th).
Robert Leonard, Managing Director and Global Head of Capital Services at Credit Suisse, says: “Institutional investors remain committed to their hedge fund allocations and are optimistic for further growth in the industry during the upcoming year. This year’s survey provides some interesting insights into how institutional investors are considering positioning their hedge fund portfolios for the possibility of continued volatility in global markets.
“Increased interest in strategies such as equity market neutral, global macro and equity long/short trading-oriented appears to indicate that investors are anticipating another challenging environment for 2016. Key factors noted in making new allocations were net returns, pedigree of investment team and lack of correlation with other investments.”
Global Macro-Discretionary (net demand 29 per cent) was the 3rd highest preferred strategy according to investor responses, falling slightly from the top spot last year, but remaining a key area of focus for allocators.
Investors also ranked Equity Long/Short-Trading (net demand 21 per cent) and Equity Long/Short–Fundamental & General (net demand 18 per cent each) in the top 5. The increase in interest for Equity Long/Short-Trading was significant; it moved up from last year where it was ranked 15th.
Appetite for TMT strategies (net demand 11 per cent) moved up to the top ranked sector, while Healthcare (7 per cent net demand), which was last year’s top ranked sector, fell to the second spot. Interest in Financials sector (net demand 6 per cent) also increased in this year’s survey.
Interest for Developed Europe (36 per cent net demand) had the largest increase over last year and remained in the top spot. Asia Pacific (28 per cent net demand) and Global strategies (26 per cent net demand) followed behind with Japan focused strategies (17 per cent net demand) next in line.
The top three factors indicated when selecting hedge funds for an institutional portfolio are returns after fees, pedigree of risk takers & core team stability and non-correlation with other investments. Other factors include degree of transparency and ability to lower volatility in the overall portfolio.
Only 2 per cent of investors highlighted a lower target weight of hedge funds in their portfolio as the key driver of their redemptions last year. Almost half of respondents highlighted individual manager underperformance as the key reason for the redemptions they made in 2015 with 25 per cent indicating a top down shift in strategy preference as their main factor.
When asked to opine on potentially significant developments that could occur in 2016, investors listed renewed focus on short-selling skills, potential for asset/liability mismatches, fee compression, additional fund closures and increased competition from alternative structures (such as UCITS, Liquid Alternatives and Co-Investment funds).
