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Nearly 40% of European hedge fund investors expect to up allocations

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Nearly two-fifths (39%) of asset owners in Europe that already invest in hedge funds are expecting to increase their allocations over the coming 12 months, according to the latest Cerulli Edge – Global Edition. 

Of the private banks and wealth managers in the region, 36% are planning to increase their recommended allocations to hedge funds over the same period.

When it comes to private assets, the report says that although there are still concerns that investors are overexposed due to the “denominator effect,” Cerulli’s research indicates that most investors remain well under-allocated so will continue to expand their private asset programmes.

Semi-liquid funds are becoming more popular among wealth managers and individual investors, especially high-net-worth (HNW) and ultra-HNW (UHNW) investors. Half of the UK wealth managers favour semi-liquid funds when investing in private markets. Demand for semi-liquid funds is also high in Italy and Switzerland.

According to the research, 39% of the 207 institutional investors Cerulli surveyed between December 2022 and January 2023 are considering increasing their allocations to liquid alternatives over the next 12 to 24 months, with particular focus on long-short equity, long-short credit, managed futures, and multi-strategy products.

Of the 153 private banks and wealth managers Cerulli surveyed in January 2023, more than one-third (36%) plan to increase their recommended allocations to hedge funds and liquid alternatives. Over the next two years, the most demand for hedge funds is expected to come from family offices and UHNW clients. Multi-strategy, global macro, and equity market-neutral hedge fund strategies are likely to be favoured. Relative value could experience a tough year: it was the only hedge fund strategy to see a net decrease (4%) in the number of private bank respondents planning to allocate to it.

The diversification liquid alternatives and hedge funds offer is among the factors motivating investors to look beyond traditional investments. Institutional investors are increasingly using non-UCITS and offshore hedge funds, with the focus on strategies that allow higher volatility and fewer environmental, social, and governance (ESG) restrictions in the hope of increased returns.

A benefit highlighted by the hedge fund managers is that any outperformance will appeal to investors that do not currently allocate to hedge fund strategies. Cerulli expects significant demand for infrastructure strategies from institutional investors as well as private banks and wealth managers.

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