institutional investor money will flow into hedge funds in 2017, according to a
Credit Suisse annual hedge fund investor survey. The 320 institutional
investors responding to the survey, who make up more than $1 trillion in hedge
fund investments, anticipate a 3.5% increase in net hedge fund inflows for
2017. And 87% of them are looking to either hold
constant or hike up their hedge fund allocations.
are making a push for better return terms, with 61% pointing to at least one
hedge fund manager they work with shooting for a basic hurdle rate. And 57 % of
the institutional investors have seen a reduction in the past 12 months in the
management fees they pay hedge funds.
at a time when investors such as Warren
Buffett have criticized hedge funds for their high fee structure. The
typical hedge fund fee setup rewards their managers with 2 % of the assets
under management and 20 % of any profits.
addition to anticipating more favorable terms on their fees, other notable
developments these institutional investors are looking to in 2017 include more
funds shutdowns. They also anticipate that hedge funds will be impeded by fewer
regulations in 2017.
Leonard, global head of capital services at Credit Suisse, said, “Institutional
investors remain strongly committed to hedge funds playing a role in their
portfolios. However, they also appear to be following through and making real
changes to their hedge fund allocations. This includes increased concentration
with funds in their portfolios, adding strategies that are less correlated with
equities and terms that better align their long-term interests with those of
A mere 30 % of these investors are happy with the returns on
their hedge fund holdings this year, going by those who said the investments
met or surpassed their return expectations, a major falloff from the 45 % of
investors who reported the same for last year. For 2017, the institutional
investors are targeting a 7.2 % annual return for their hedge fund holdings,
although the average industry return was 5.5 % for 2016.
performance was the main factor driving redemptions from hedge funds, with 80 %
of institutional investors pointing to the disappointing returns of individual
managers as a cause to exit a hedge fund investment. Changes at a manager,
whether in terms of personnel changes or “style drift” also caused 52 % to opt
out of their holdings.
fund strategy that the institutional investors most prefer for 2017 is “global
macro-discretionary”, with 26 % net interest in this approach. Fixed income
arbitrage and emerging market equity strategies are the secondmost preferred
strategies, with 18 % overall demand for these approaches.
The investors are moving more towards equity funds focused on
specific sectors, rather than general equities strategies. Favored equity
sectors include healthcare and financials. Investors are also more interested
in quantitative strategies this year, as well as hedge fund startups, with 44 %
investing in a startup last year, and 75 % of these investors receiving favorable
terms on such investments.
As to what factors matter when it comes to selecting a hedge
fund, institutional investors mostly look to the hedge fund’s returns after
fees, no correlations with the institutional investors’ other investments, the
caliber and risk management skills of the managers, as well as the overall
stability of the core team.
By Poonkulali Thangavelu