Higher Rates Bring Higher Expectations for Hedge Funds: BNP Paribas
Posted by Colin Lambert. Last updated: October 12, 2023
A survey undertaken by BNP Paribas’ capital introduction team finds that higher interest rates have inevitably led to higher performance expectations on the part of hedge fund managers and investors, although there is a gap between the two camps’ targets.
The survey polled 48 investors and 34 hedge fund managers to assess the impact of higher risk-free rates on both hedge fund performance and terms. BNP says in the current environment investors expect 2.9% more in returns for their portfolio of hedge fund investments, and are targeting an annual return of 9.75% ,up from 6.85%. Managers are more assertive, however, with 62% believing they should outperform the risk-free rate by 6% or more.
Manager respondents hold unencumbered cash of 33.9% on average, BNP reports, with two-thirds of investor respondents ask managers for their target/typical level of unencumbered cash holdings. Meanwhile 42% of investors ask managers for the return they generated from cash holdings (a combination of unencumbered cash, short rebate and cash margin held at counterparties).
Managers want more patience from investors when it comes to being evaluated on performance in the higher rates era, the survey found managers feel they need 29 months to be accurately assessed, while investors only seem willing to give them 19 months. Similarly, only 42% of managers agree that a hurdle rate – the minimum performance rate – should be in line with the risk-free rate, whereas 90% of investors believe that should be the threshold.
In what is perhaps an example of chasing performance, the BNP report concludes by noting that nearly half of the investor respondents are making strategy allocation changes as a result of the change in rates. Their main targets are credit, CTA and discretionary macro, the latter two in particular are out-performing in 2023.