Hedge fund investors are reporting increasing difficulty in finding attractive funds in which to invest, according to a survey by Preqin.
In June, almost half of investors said they were planning to reduce their allocations to hedge funds over the next 12 months. Of these, 38 per cent said that three-year performance was the driving factor behind the decision, while a further 16 per cent said their outlook on future performance was negative.
When looking to make new fund commitments, investors are faced with a wide dispersion of returns within and between different leading hedge fund strategies. With almost 15,000 hedge funds currently open to investment worldwide, this poses a significant challenge to investors seeking to expand or modify their hedge fund portfolios.
Forty-nine per cent of investors plan to reduce their exposure to hedge funds over the next 12 months.
Of these, 38 per cent cite three-year performance as the leading reason for reducing exposure, while 16 per cent cite a negative outlook on performance.
Forty-eight per cent of investors report that fewer than half of their portfolio hedge funds have met expectations over the past 12 months.
When selecting new funds, 76 per cent of investors look for a successful team performance track record, while 54 per cent seek proven experience and 51 per cent desire successful firm-level performance.
However, performance can differ between and within leading strategies: interquartile ranges for annualised three-year returns vary from 5.12 per cent for relative value funds to 7.73 per cent for macro strategies funds.
As such, investors are more satisfied with some strategies than others. Seventy-six per cent feel event driven strategy hedge funds have met expectations in H1 2017, compared to just 48 per cent that say the same of macro strategies funds.
Investors’ allocation plans vary accordingly. While a third of investors are looking to increase their allocations to relative value hedge funds, and none are looking to reduce exposure, almost equal proportions are looking to increase (15 per cent) and decrease (12 per cent) exposure to multi-strategy funds.
There has been significant growth in the number of active hedge funds in recent years, up from 12,500 in 2012, to 14,779 in June 2017.
“Hedge fund investors recognise that the performance of the industry has made some progress over the past year, but they still have serious concerns over the returns generated by funds in their portfolios,” says Amy Bensted (pictured), Head of Hedge Fund Products at Preqin. “Despite the industry posting 11 months of gains in the 12 months to the end of June, half of investors report that half of their portfolio has not met their expectations. Over the longer term, this is even more pronounced: 70 per cent of investors feel that three-year performance has failed to meet their requirements. ”
“Given this dissatisfaction, it is not surprising that underwhelming three-year returns are the foremost reason investors give for reducing allocations. This process is likely to involve reallocation or rebalancing, but in this regard investors are faced with a number of significant challenges. The dispersion of returns between different leading hedge fund strategies is wide, and with thousands of funds pursuing each strategy there is great variance within each as well. There are now almost 15,000 hedge funds open to investment, far more than can be evaluated individually by institutions, and so building an effective portfolio that meets their needs is becoming an ever-larger task.”
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