Barclays investor poll predicts rush of new capital in “breakout year” for hedge funds

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Hedge funds could be set for a rush of new capital pouring into the industry this year – potentially reaching up to USD30 billion – as investor appetite grows following strong 2020 performances, Barclays said on Wednesday.

The bank’s ‘2021 Global Hedge Fund Industry Outlook and Trends’ report found that allocator sentiment towards hedge funds is the strongest it’s been since 2014, with 41 per cent of all investors planning to increase their hedge fund exposure this year.

The annual hedge fund investor survey quizzed 240 firms representing USD5 trillion in assets, including USD725 billion of hedge fund investments - roughly 22 per cent of total industry capital.

The bank’s Strategic Consulting team, which ran the poll, said hedge funds could draw between USD10 billion and USD30 billion of projected net inflows from investors, and around USD450 billion in gross allocations, in what could prove “a breakout year” for managers.

The far-reaching report observed how the industry successfully weathered the coronavirus shock last year, as markets faltered and investor plans were thrown into turmoil.

Total industry assets globally surged to an all-time record high of USD3.6 trillion, as hedge funds generated average annual returns of almost 12 per cent in 2020, while also recording their fourth-highest upside capture rate and alpha in two decades.

“The average hedge fund capture rate was 56 per cent during the Covid-19 recovery, versus 42 per cent for the past four crises,” the report said of the H2 rebound. “Alpha was 9.9 per cent versus 2.1 per cent for previous crises; only the Global Financial Crisis came close at 6.3 per cent.”

But although hedge funds came out swinging in the second half of 2020, posting strong gains after a bruising Q1, first half investor outflows still ultimately outweighed second half inflows. Altogether, allocators withdrew USD30 billion in total last year, the third consecutive year of negative flows.

Now, though, a broad range of investors are keen to put that capital back to work, with family offices and private banks the most bullish on hedge funds, Barclays said. The main objectives centre around portfolio diversification, risk mitigation, and hedge funds’ potential to earn “equity-like returns with bond-like risk.”

Underpinning this upturn in sentiment is the strong reversal in fortunes last year. Following the Q1 slide, managers recorded their best three-quarter performance since 1991, up more than 26 per cent on average. 

Indeed, only private equity/venture capital structures ranked higher than hedge funds as the preferred destination for investor capital, the study found.

The report also examined how post-Covid plans are evolving after lockdowns and social distancing threw operational due diligence into disarray.

Many investors opted to stick with existing hedge fund relationships last year rather than establish new ones.

“With managers unable to meet face to face, 97 per cent of investors adjusted their operational due diligence processes, and more than half plan to continue those changes post-pandemic,” Barclays said.

“After generally not expanding their hedge fund rosters in 2020, investors appear likely to begin forging new hedge fund relationships again as they allocate an estimated gross of USD450 billion throughout 2021.”