Hedge funds now front-runners to boost investor returns this year, says Credit Suisse survey

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A majority of investors now believe hedge funds are best placed to enhance the performance of a traditional 60/40 equities and bonds portfolio, with the prevailing rate environment driving a “sense of urgency” among allocators to tap into new sources of returns, a new Credit Suisse survey has found.

The bank’s 2021 Hedge Fund Investor Survey, titled ‘A New Dawn’, quizzed more than 200 institutional investors, collectively representing USD800 of hedge fund investments globally. Survey participants – which included pensions, endowments, foundations, consultants, private banks, family offices, and funds of hedge funds – were probed on strategy preferences, allocation plans, and growth and return forecasts, among other things.

The annual study found that more than two-thirds – 70 per cent – of investors plan to amend their portfolios this year due to the lower bond yield environment. Hedge funds are the most favoured asset class to bolster the current 60/40 equities/bond mix and plug the funding gap, followed by high-yield credit, equities, and private credit.

At the same time, equity-focused strategies are among the most popular class of hedge funds with investors. Survey data shows that seven out of the top 10 overall strategies were equity-oriented, with investors eyeing healthcare, fundamental, emerging markets, and TMT focused managers this year. Regionally, meanwhile, Asia-Pacific is the most in-demand region among allocators, with China the most preferred country.

“Investors indicated continued strong interest in equity-oriented strategies, particularly around sector and regional specialists. We also noticed a large sentiment upswing for discretionary macro and multi-strategy managers,” says Jaynita Sodhi, head of Credit Suisse Capital Services Americas.

Sodhi observed that hedge fund performance dispersion for firms employing such strategies widened sharply 2020, once again underlining the importance of manager selection in driving portfolio returns.

Elsewhere, as private markets continue to evolve and expand, more than half (53 per cent) of allocators are now using hedge funds to invest in private markets equity, with family offices and endowments and foundations the most active. The report pointed to strong supply of pre-IPO companies and attractive return potential as two of the key drivers pushing the rise of private markets.

The report also spotlighted the increasing importance of non-traditional investment vehicles and structures, reflecting the changing nature of hedge funds’ business models and the continuing shift in the investor-manager dynamic.

Some 61 per cent of allocations over the past 12-18 months have flowed into non-traditional structures – mainly custom offerings such as co-investments and managed accounts – as investors increasingly look to bespoke solutions for specific investment objectives. Credit Suisse said that number is set to increase to 64 per cent in 2021.

John Dabbs, global co-head of prime services and Co-Head of Americas Equities, said the survey’s findings show that investors are looking to hedge funds in addition to other asset classes in meeting their long-term obligations.

“The current rate environment is creating a sense of urgency for investors to identify new sources of returns for their fixed income portfolio,” Dabbs noted.

Joseph Gasparro, head of content, Credit Suisse Capital Services Americas, added: “We've seen an uptick in demand from LPs to access private markets through hedge funds, given a manager’s ability to apply the breadth of their public markets investing acumen to private opportunities.

“Privates also allow managers to engage with next-generation companies that could be disruptive to publicly-traded peers.”

Credit Suisse’s findings chime with a recent cluster of studies suggesting investor interest in hedge funds is dramatically rebounding. Last month, Barclays’ annual ‘2021 Global Hedge Fund Industry Outlook and Trends’ report forecast some USD30 billion of new capital pouring into the industry this year, with 41 per cent of all investors set to increase their hedge fund allocations this year.

The apparent increased drive comes on the back of the industry’s best annual performance in more than a decade. On average, hedge funds posted a near-12 per cent annual return last year, according to Hedge Fund Research, outflanking both the Dow Jones Industrial Average and FTSE 100 in 2020.