Institutional investors are still looking for a way out of the interest rate trap while seeking to protect their allocation from market fluctuations and are increasingly opting for hedge funds when making investment decisions.
According to hedge fund database provider Eurekahedge, assets under management in the hedge fund industry have reached an all-time high of USD3.4 trillion. In 2017, USD31.7 billion was paid into UCITS and offshore funds globally, and in the first half of the current year this figure grew by a further USD5 billion net.
Marcus Storr, Head of Hedge Funds at FERI, says: “Many pension funds and pension schemes are gradually getting their capital paid back from bond allocations that once offered attractive yields. As there is no consideration of reinvesting in fixed income markets due to the low interest rates, a larger proportion of this capital is now going into alternative investments. Demand for hedge funds will therefore remain high in 2018.”
According to FERI, the main reason for opting for alternative investments, apart from enhanced diversification and lower correlation to equities and bonds, is the lower risk, measured as volatility. Whereas, for instance, the MSCI World Total Return showed 14.72 per cent volatility from January 2002 to June 2018, the corresponding measure of fluctuation among long/short equity strategies was only 8.64 per cent (as measured by the DJ Credit Suisse AllHedge L/S Equity).
Storr says: “A long-term average return of more than 6 per cent per annum can be obtained on the global equity market. With a long/short equity strategy, it is possible to obtain a comparable result with reduced volatility.’
“Long/short equity strategies form the largest strategy class in the hedge fund investment universe; around 40 per cent of all managers operate in this segment. With the large number of long/short equity funds being investable, the rate of success largely depends on the skills of the manager selected”, FERI’s Head of Hedge Funds explained: “The success of long/short strategies for investment ultimately depends on how good the fund manager is at assessing market risks, and what method is used to limit those risks. A lot of experience and specialist knowledge of the relevant sectors or countries is needed, especially in relation to short selling of equities.”
