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Credit Suisse survey: Hedge funds now top choice among investors, as appetite soars in 2020

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Hedge funds have emerged as the top pick among asset allocators heading into the second half of 2020, outflanking other products such as private equity and real estate as investors’ asset-class-of-choice, according to new data from Credit Suisse, which showed hedge funds have met or exceeded the expectations of some two-thirds of investors so far in 2020.

The bank’s 2020 Mid-Year Hedge Fund Investor Survey – titled ‘Navigating Unchartered Waters’ – probed evolving allocator appetite, surveying some 160 institutional investors during May and June, collectively representing around USD450 billion in hedge fund investments globally.

The wide-ranging study quizzed a broad mix of pension funds, endowments, family offices, insurers, funds of funds, advisors, consultants and more on their allocations, redemptions, and strategy appetite, among other things.

The findings show that hedge funds are drawing the highest net demand among the various asset classes surveyed by Credit Suisse, with 32 per cent of investors set to increase their allocations to the product.

By comparison, 27 per cent of investors intend to grow their equity long-only active buckets, 20 per cent of allocators are increasing their private equity/venture capital investments, followed by real estate (14 per cent), infrastructure (11 per cent), and commodities (6 per cent).

Altogether, some 5.1x more investors plan to increase their hedge fund allocations rather than decrease them.

“Preference for hedge funds has improved significantly since 2017, as show by net demand, culminating with hedge funds in the pole position for the first time,” the report observed.

In terms of strategy type, Credit Suisse’s research points to a rotation towards equity-focused hedge funds strategies in the second half of the year, with equity healthcare drawing the most interest (30 per cent), followed by equity fundamental (29 per cent), and equity TMT (22 per cent). The report also observed growing appetite for distressed and structured credit strategies in light of prevailing market dislocation.

Underlining the strengthening investor confidence, the study found that any money investors pull from their hedge fund allocations will remain within the industry, with most planning to recycle capital into other hedge funds.

While more than half (56 per cent) of survey participants either made or intended to make redemptions during Q2 this year – mainly for idiosyncratic or top-down shifts in preference, a total of 92 per cent of those who made redemptions plan to recycle their capital into other strategies – a five-year high.

This swelling appetite is being fuelled by hedge funds’ overall performance within broader portfolios during the market ruptures during the first half of the year, the research indicates. Roughly two-thirds (65 per cent) of investors said their hedge funds either met or exceeded their expectations in 2020 to the end of May, while just 35 per cent said they failed to meet expectations.

Geographically, investors in the Americas and APAC regions favour equity healthcare-focused hedge funds as their top pick, while ESG strategies are the first choice for EMEA-based allocators.

Elsewhere, investors appear to be ‘closer to home’ in their allocations, the study noted, with more than 80 per cent of allocators indicating they intend to invest with managers already in their portfolio.

The finding chimes with recent anecdotal evidence indicating lockdown constraints have curbed the ability of hedge fund managers to build fresh relationships with new clients, in the absence of the face-to-face meetings.

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