As both public and private markets enter a period of turbulence and drawdowns, hedge funds are set to prove popular with investors in the second half of 2022, as the recession and geopolitical volatility all play to the industry’s advantage.
• 83% of managers expect institutions to increase their hedge fund allocation in the next two years
• This interest is primarily driven by family offices and endowments and foundations
• Sector equity, global macro, and credit are all proving popular with investors this year
As both public and private markets enter a period of turbulence and drawdowns, hedge funds are set to prove popular with investors in the second half of 2022, as the recession and geopolitical volatility all play to the industry’s advantage.
The research forms part of the latest Performance Insight Report, H1 Update: Hedge funds traverse 2022’s economic turmoil.
Hedge fund strategies are proving attractive in volatile markets, with managers expecting them to generate absolute returns, mitigate risk, and offer a solution to portfolio diversification.
“Investor sentiment is currently very favourable from what we’re seeing and hearing. Investors who don’t currently have an allocation to hedge funds are anxious to have the conversation about revisiting this in their portfolios, and we’re delighted to carry out those dialogues,” says McMillan.
According to Barclays Strategic Consulting survey, the strategies that are set to prove most popular with investors in 2022, include sector equity (26%) global macro, credit long/short (22%) and multi-strategy (17%).
CTAs and diversifiers (neutral beta and neutral markets) will prove key to tackling ongoing market volatility and inflation across the next few months, and trend followers are working well in the space.
Duncan Moir, senior investment director at abrdn, believes that hedge funds are being given the opportunity to “do what they’re meant to do” and thinks that certain investors may back riskier allocations.
This kind of interest is being driven primarily by family offices (68%) and endowments and foundations (55%), according to data from AIMA.
“They may look to risk mitigating strategies for some diversification. Since, in theory, endowments and foundations have perpetual capital, they may be a bit more comfortable taking more risk on the return seeking side,” says Jason Josephiac, senior vice president, Meketa.
A recent report from Managed Funds Association shows that an average university with a $5 billion endowment and a 10% allocation to hedge funds earns nearly $240 million more over five years than an endowment with no allocation to hedge funds.
McMillan believes that trend following will be well-positioned in the coming months, but that ultimately having a diversified portfolio is always crucial.
“I do believe that trend following is likely to continue to be well-positioned for the market. So managed futures, macro – those are the strategies that are really top of mind to us. I wouldn’t be surprised if long/short equity is able to deliver some good results.
“Ultimately, if we do end up having a recession, distressed investors will certainly be able to provide capital and restructure balance sheets, positioning their portfolios well going forward. Predicting the relative performance of strategies can be a difficult game, but a diversified portfolio is usually the safe bet,” he says.
Key Takeaway | Managers: Investors will increasingly be looking to allocate capital to hedge funds as a risk-mitigating strategy and with the aim of diversifying their portfolios. Investors who are new to the space are looking to have initial conversations with managers about investing in hedge funds
