Investors Planning Increased Hedge Fund Allocation: Survey

The latest bi-annual investor focused report by business intelligence provider HFM, and the Alternative Investment Management Association (AIMA), has found that more than 80% of investors were satisfied with the performance from their hedge fund investments in the first six months of 2021.

Unsurprisingly, the key to the finding is continued gains achieved by hedge funds, who collectively have reported their strongest first half of a year since 2009. The sustained performance has been rewarded, however, with 2021 capital inflows up to May (+$57.8 billion) eclipsing outflows seen in 2020 (-$23.4 billion) by more than two-fold.

“Hedge fund managers posted the strongest first-half returns since 2009 during H1 and are on track to achieve the best Sharpe ratio since 2017,” says HFM’s chief data officer Elias Latsis. “While investor satisfaction with performance remains high, the slight pullback witnessed since our last survey shows the bar for success has been set higher by managers’ outperformance during Q2 2020.”

Probably of more interest to managers, the survey finds that more than one-third of all respondents are planning to increase their allocation and 51% plan to maintain their present allocations. The percentage of investors planning to increase their allocation to hedge funds dipped marginally compared to figures highlighted in the previous Investor Intentions report, which AIMA says can be partly attributed to some investors finding themselves over-allocated to hedge funds and adjusting accordingly. It adds though, that there are also some examples of investors being pragmatic in their weightings and remaining above target. More sophisticated investors are also exploring other strategies within the alternative investment universe, with respondents highlighting an increased appetite for private equity and credit funds, among other less liquid products.

The research, conducted in Q2 2021, surveyed 108 investors (with $7.6 trillion in total investor assets) and senior investor relations and marketing professionals from 128 hedge fund managers to discover the changes allocators plan to their portfolios and how managers plan to raise assets in H2 2021.:

Beyond reaching target allocation, the existence of new opportunities within the asset class is the principal reason investors plan on increasing their hedge fund allocation (38%), followed by strong return expectations (31%). Global macro strategies are likely to see the strongest inflows in H2 (32% of investors planning an increase), with investors particularly interested in the strategy’s ability to hedge against rising inflation. Long/short equity and multi-strategy funds can also expect significant investor interest, with 31% planning increases.

The survey also found that managers are moving away from pandemic stand-ins as new sources of leads, notably referrals from existing clients, and instead are more likely to lean on prime broker cap intro teams to generate new business opportunities in the second half of the year. Interest in allocation to private credit, first highlighted in the previous Investor Intentions report, was this time cited by investors as the most popular strategy to counter low fixed income yields.

Managers’ top investor targets are private wealth investors, such as family offices and high net worth individuals, who feature even more prominently than they did when HFM and AIMA last surveyed managers six months ago.

Despite increasing freedom to travel over the past couple of months, both managers and investors remain wary about a snapback in restrictions, with both groups planning relatively few new meetings in the second half. Both have, however, found ways around impediments to face-to-face meetings, with nearly two thirds (63%) of managers surveyed having completed virtual operational due diligence with a new investor in the preceding six months.

“The findings of this report underscore the experience of AIMA’s members and our research, including the quarterly Hedge Fund Confidence Index, which emphasises that investors value hedge funds’ ability to protect against downside risk and provide steady performance in a variety of market conditions,” says Tom Kehoe, managing director and global head of research and communications at AIMA. “The vast majority of investors unsurprisingly remain satisfied with their hedge funds performance and are considering their future allocation plans accordingly. If the industry’s performance in H1 can be sustained for the rest of the year, it will have generated its highest returns for investors in over a decade.”