Investors are turning increasingly bullish on hedge funds, new Barclays outlook shows

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The resurgent investor appetite for hedge funds is underlined in new data from Barclays’ Prime Services Capital Solutions unit, which shows allocator flows turning positive for the first time in four years, new hedge fund launches outweighing liquidations, increased investor willingness to make allocations without in-person meetings, and total industry assets soaring to an all-time record of USD4 trillion.

The latest ‘Hedge Fund Industry Update – Outlook for 2H21’ from Barclays’ Prime Services Capital Solutions group noted global hedge fund industry assets reached an all-time of high of USD4 trillion during the first half 2021, a year-on-year rise of some 9 per cent, and the biggest growth since 2013.

At the same time, hedge fund industry flows have turned positive for the first time since 2017, the data shows, with investors adding USD18 billion during the first half of 2021 as flows stayed positive over the last four quarters.

The first quarter of 2021 also saw more hedge funds launched than closed, the first time since 2014 that launches outweighed liquidations. The total number of funds stood at 8,092 at the end of Q1, according to Barclays data – up from 8,054 at the end of 2020.

Barclays’ Strategic Consulting team surveyed more than 200 investors, collectively representing some USD415 billion in hedge fund assets, and a total of around USD4 trillion in total assets under management during June to gauge allocator sentiment on the sector.

Polling found that investor sentiment towards hedge funds is even stronger than in Barclays’ 2021 Outlook, with appetite strengthened by a mix of high equity values, inflation and hedge funds’ strong performance last year, when the industry posted annual returns of some 12 per cent.

“Investors seem keen on reducing cash and fixed income and increasing exposure to hedge funds and, as in previous years, illiquid asset classes,” it said.

Strategy-wise, sector-specialist hedge funds are most in favour among allocators, with the survey showing some 28 per cent of investors planning to grow allocations to those managers, with healthcare-focused strategies leading the way.

Around 15 per cent of allocators intend to increase allocations to event driven special situations, 13 per cent plan to add capital to equity market neutral funds, with 12 per cent opting to pour more capital into discretionary macro and multi-strategy managers.

The analysis also gauged the impact of Covid-19 and related travel restrictions on investor allocations to hedge funds, and explored the extent to which new allocations have been made without meeting managers due to social distancing and lockdowns.

Meetings with hedge funds in the portfolio was a key driver for 90 per cent of managers polled, while 78 per cent said meetings with hedge funds not in their portfolio was a main driver of travel. That compares with 55 per cent naming conferences, and 44 per cent opting for operational due diligence, as key drivers for travel.

But close to two-thirds – 61 per cent – of investors expect to travel less compared to pre-Q1 2020, compared to 4 per cent saying they plan to travel more. Some 20 per cent said they intend to travel the same amount as before the pandemic, though 15 per cent said it remains too early to say.

“Meeting hedge funds appears to be the key driver for investors to travel, though a majority indicated they plan to travel less post-pandemic as they appear willing to allocate without in-person meetings,” Barclays noted.

Specifically, some 61 per cent of investors have now allocated to new managers without meeting in-person first, with 60 per cent planning to make allocations. Private banks are the most keen, with 79 per cent having both made allocations and planning to make allocations without meeting in-person. Among family offices, some 70 per cent have made allocations, and 63 per cent are planning to make allocations, while fewer than half of endowments and foundations have made allocations (44 per cent) or are planning to make allocations (43 per cent).

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