Despite the majority of institutional investors redeeming from hedge funds during the first half of this year, most continue to view hedge funds as playing a key role in their investment portfolios, according to the Credit Suisse Mid-Year Investor Sentiment Survey.
Some 73 per cent of respondents, institutional investors on a global basis including fund of funds, family offices, consultants, endowments and foundations, private banks and pension funds representing almost USD700 billion in hedge fund investments, say they will likely make additional hedge fund allocations during the second half of 2016.
Redemptions appear to have been highly targeted as 63 per cent of investors indicated that the primary driver of first half redemptions was specific fund underperformance or style drift. Eleven per cent of investors attributed redemptions to changes in their asset allocation model, while only nine per cent said that they were a result of disappointment with the performance of their hedge fund portfolios in general.
The top three most frequently mentioned strategies being considered for second half allocations were equity long/short, equity market neutral and global macro, which were also three of the top strategies in the Credit Suisse Annual Investor Survey conducted earlier this year.
Robert Leonard (pictured), managing director and global head of capital services at Credit Suisse, says: “Despite some outflows from the hedge fund industry this year, most institutional investors appear to be staying the course and intend to recycle the vast majority of capital back into other hedge funds.
“Investors also indicated that their redemptions have been highly targeted and selective mostly driven by specific fund performance rather than an overall change in attitude towards hedge funds in general.
“It is notable that while some investors expect to make additional redemptions in the second half of this year, almost three quarters indicated that they will also likely be making new allocations to hedge funds during that time as well. This confirms institutional investors continue to see a role for hedge funds in their portfolios.”
The survey also reveals that the majority of investors (84 per cent) have undertaken some level of redemptions from their hedge fund portfolio during the first half of this year.
Some 82 per cent of investors who redeemed from hedge funds during the first half indicated that they would likely reallocate that capital to existing hedge funds in their portfolio as well as to new funds. Only 9 per cent of investors said that they were not likely to reallocate redeemed capital to hedge funds.
Main drivers for potential future allocations were identified to be opportunistic, based on strategy or manager performance (60 per cent) and continued outperformance of current hedge fund allocations (12 per cent).
Pension funds proved to be the “stickiest” investors during the first half of this year with 31 per cent reporting no redemptions to their hedge fund portfolios. That was followed by endowments/foundations at 25 per cent, family offices at 13 per cent and fund of funds at 8 per cent.
With respect to preferred structures (other than traditional master/feeder), investors indicated additional interest in liquid alternatives, risk premia vehicles and equities co-investment.
Looking ahead, 76 per cent of US investors said they would likely make second half allocations to hedge funds. Some 86 per cent of APAC investors and 64 per cent of EMEA investors indicated they were also likely to do so.
