Almost three-quarters (74 per cent) of institutional investors says their hedge fund portfolios met or exceeded their return expectations during 2017, according to Credit Suisse’s Tenth Annual Global Hedge Fund Investor Survey – Great Expectations.
This is a significant increase from the previous year, when only 30 per cent of investors were satisfied with the performance from their hedge funds allocations.
The survey reveals a strong investor appetite for equity-focused strategies in 2018 (eight out of the top 10 strategies), with investors indicating strong interest for a variety of equity focused approaches including: Emerging Markets Equity (33 per cent); Fundamental Equity Long/Short (20 per cent); Quantitative Market Neutral (19 per cent); and Equity Long/Short Sector funds (Healthcare, Financials & TMT).
The survey also highlights how a more diverse array of fee structures is being offered to investors than ever before, with 76 per cent of investors taking advantage of options such as early stage discounts from new launches, reduced fees for longer lock-ups, sliding fee schedules based on fund AuM, large ticket discounts and hurdle rates or other types of customised terms.
Robert Leonard (pictured), Managing Director and Global Head of Capital Services at Credit Suisse, says: “Last year hedge funds had strong performance and also continued to improve the alignment of interests between themselves and their investors. Accordingly, as we begin 2018, the vast majority of institutional investors appear pleased with the contributions from their hedge fund portfolios. In fact, the number of investors who indicated that their hedge fund allocations met or exceeded their expectations more than doubled from last year, which is a very positive development for the industry.”
According to the survey, for the third straight year, investors increased the target return expectations for their hedge fund portfolios. Investors now expect to realise returns of 8.53 per cent during 2018 from their hedge fund allocations, up from 7.25 per cent expected returns in 2017.
Investor interest in APAC (50 per cent), Emerging Markets (39 per cent) and EMEA (32 per cent) topped the regional focus list, as allocators continue to search for value. Conversely, net demand for North American markets was relatively flat, as investors appear to be comfortable with their current allocations to the region.
Risk Management capabilities (63 per cent) topped the list as the single most important factor that investors utilise when evaluating hedge funds for potential allocations. In addition, they also indicated that Team Pedigree (60 per cent) and Outperformance of Passive Benchmarks (48 per cent) are other key factors in their decision making process.
Overall investor sentiment is positive for the hedge fund industry, with respondents forecasting 5.4 per cent growth in assets under management during 2018. This comes as the industry begins the year at an all-time high for assets under management of USD3.21 trillion.
Investors remain constructive on the new launch environment, with 63 per cent of all respondents indicating that they had allocated to a newly launched fund last year. Fund of funds (80 per cent) and family offices (65 per cent) were the most likely to have invested in a start-up hedge fund, while pension funds (27 per cent) were the least likely investor segment to do so.
Investors also indicated an appetite for utilising a wide range of structures in addition to commingled accounts, including managed account formats, opportunities for co-investment, risk premia strategies, long-only funds and UCITS. One of the strongest areas for growth has been co-investment opportunities, with 30 per cent of investors participating in such investments last year, versus only nine per cent in 2009.
When asked about potentially significant developments that might occur this year, investors forecast the ongoing realignment of fees/terms, increased volatility, hedge fund outperformance, the continued rise of Artificial Intelligence driven & Cryptocurrency focused strategies, as well as industry consolidation (by number of funds).
