Overall sentiment is positive for hedge fund industry growth with investors forecasting a 3.5 per cent increase in new inflows during 2017, according to the ninth annual Credit Suisse Hedge Fund Investor Survey.
Entitled Shifting Tides, the survey, which is based on responses from over 320 institutional investors representing USD1.3 trillion of hedge fund investments, reveals that the industry began the year at an all-time high for assets under management of USD3.018 trillion.
Investors appear to be making real headway in the push for better alignment of terms, with 61 per cent of respondents reporting that they had at least one manager in their portfolio with a hurdle rate, while 57 per cent said their management fees were lowered in the past 12 months.
Global macro-discretionary was specified by investors as the most preferred strategy for 2017 with 26 per cent net demand. Fixed income arbitrage/relative value, with 18 per cent net demand, was ranked as the second most in demand strategy by investors. Emerging markets-equity rounded out the top three, also with 18 per cent net demand.
Robert Leonard, managing director and global head of capital services at Credit Suisse, says: “Institutional investors remain strongly committed to hedge funds playing a role in their portfolios. However, they also appear to be following through and making real changes to their hedge fund allocations. This includes increased concentration with funds in their portfolios, adding strategies that are less correlated with equities and terms/structures that better align their long-term interests with those of their managers.
“Importantly, after years of discussion, it appears that there is now real progress being made by institutional investors and hedge fund managers in finding an equitable middle ground. While still an ongoing dialogue, it is nevertheless encouraging and a positive sign for the hedge fund industry going forward.”
Investors reflected a pivot from broad based equity strategies towards sector focused ones. Top equity sector strategies include healthcare (no5) with 16 per cent net demand, financials (no7) with 15 per cent net demand and TMT (no12) with 10 per cent net demand. Net demand for equity long/short fundamental declined, falling from number five last year to number 13 this year.
Other strategies identified by investors for potential allocations in 2017 include systematic strategies like equity market neutral – quantitative (no4) with 17 per cent net demand and global macro – systematic (no6) with 15 per cent net demand. This is a continuation of the trend from last year’s survey highlighting increased investor interest in quantitative strategies.
Eighty seven per cent of investors indicated that they would maintain or increase their hedge fund exposures in the coming year. This is identical to last year, when 87 per cent of investors also indicated that they would be maintaining/increasing their hedge fund allocations.
Only 30 per cent of investors said that their hedge fund portfolios had met or exceeded their expectations this year, down from 45 per cent last year. Looking forward, investors shared that they were targeting annual returns of 7.2 per cent for their hedge fund portfolios in 2017, above the industry average returns of 5.5 per cent last year.
There remains significant appetite for start-up funds, with slightly less than half (44 per cent) of respondents reporting investing in a start-up fund last year. Of those who allocated to a new launch last year, about 75 per cent reported receiving discounted or founders’ share class terms.
The top three factors indicated for selecting hedge funds in an institutional portfolio were returns after fees, non-correlation with other investments, pedigree of risk takers and core team stability. Investors also considered risk management skills to be a very important factor in manager selection as well.
As in years past, mostly idiosyncratic factors drove redemptions – 80 per cent of investors redeeming cited individual manager underperformance, while another 52 per cent cited changes at manager (whether style drift or investment professional turnover, among others).
When asked about potentially significant developments that might occur this year, investors mentioned additional fund closures, more fee compression, better alignment of terms and a decrease in the amount of financial regulations impacting hedge funds.
