Preqin: Hedge Fund Investors Challenged By Return Dispersions

Sep 28 2017 | 8:57pm ET

Investors are finding it harder to find attractive hedge funds in which to invest, according to new data from Preqin, partially explaining why nearly half in a recent survey say they will reduce exposure to the asset class over the next year despite a performance turnaround.

When looking at new fund commitments, investors are currently faced with a wide dispersion of returns within and between different leading hedge fund strategies, Preqin wrote in a research note. With nearly 15,000 hedge funds currently open to investment worldwide, investors seeking to expand or modify their hedge fund portfolios are also faced with a significant challenge.

Moreover, the survey makes it clear that one good year of returns has not eliminated investor concerns around performance. Key facts from Preqin’s research note on hedge fund investors: 

  • Forty-nine percent of investors plan to reduce their exposure to hedge funds over the next 12 months. 

  • Of these, 38% cite three-year performance as the leading reason for reducing exposure, while 16% cite a negative outlook on performance. 

  • Forty-eight percent of investors report that fewer than half of their portfolio hedge funds have met expectations over the past 12 months. 

  • When selecting new funds, 76% of investors look for a successful team performance track record, while 54% seek proven experience and 51% desire successful firm-level performance. 
  • Investors are more satisfied with some strategies than others. Seventy-six percent feel event driven strategy hedge funds have met expectations in H1 2017, compared to just 48% that say the same of macro strategies funds. 

  • Allocation plans vary accordingly. While a third of investors are looking to increase their allocations to relative value hedge funds, and none are looking to reduce exposure, almost equal proportions are looking to increase (15%) and decrease (12%) exposure to multi-strategy funds. 

  • There has been significant growth in the number of active hedge funds in recent years, up from 12,500 in 2012, to 14,779 in June 2017. 

“Hedge fund investors recognize that the performance of the industry has made some progress over the past year, but they still have serious concerns over the returns generated by funds in their portfolios,” said Amy Bensted, Preqin’s head of hedge fund products. “Despite the industry posting 11 months of gains in the 12 months to the end of June, half of investors report that half of their portfolio has not met their expectations. 
Given this dissatisfaction, it is not surprising that underwhelming three-year returns are the foremost reason investors give for reducing allocations. 

“This process is likely to involve reallocation or rebalancing, but in this regard investors are faced with a number of significant challenges,” Benstead continued. “The dispersion of returns between different leading hedge fund strategies is wide, and with thousands of funds pursuing each strategy there is great variance within each as well. There are now almost 15,000 hedge funds open to investment, far more than can be evaluated individually by institutions, and so building an effective portfolio that meets their needs is becoming an ever-larger task.” 

Founded in 2003, Preqin is a leading source of information for the alternative assets industry, providing data and analysis via online databases, publications and bespoke data requests. The company's Hedge Fund Online service is a leading source of intelligence on the hedge fund industry, with performance information for over 16,000 hedge funds across strategies and geographies. More than 47,000 professionals in 90 nations use the company’s products. 

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