Institutional investors are making progress relating to more favorable hedge fund terms, according to a midyear survey of hedge fund investor sentiment by Credit Suisse. In a sign of progress towards a better alignment of hedge fund terms and fees, more than 70% of institutional investor portfolios incorporate hurdle rates and founder’s share class structures.
Robert Leonard, global head of capital services, Credit Suisse, noted, “Institutional investors continue to realize real progress in the ongoing realignment of interests between hedge funds and their limited partners, with more favorable fee structures and terms being offered by managers. We see this initiative as being in the middle innings of a discussion that continues to evolve across the industry.”
The survey of more than 200 institutional investors, with about $660 billion in hedge fund investments, also reveals more interest in quantitative strategies. Approximately 60% are inclined to invest in strategies involving quantitative analysis in the coming three- to five-year period. Pension funds gathered the most interest in such quantitative strategies, and Credit Suisse notes that some of these pensions may not have been actively investing in quantitative strategies in the past.
More investors are interested in hedge fund allocations, with 81% indicating that they are likely or even very likely to allocate funds to hedge funds in the second half of this year, up from 73% for the second half of 2016. Fund of funds, at 86%, and family offices, at 84%, expressed the most interest in hedge fund allocations.
Other notable survey findings include:
- Hedge funds saw the highest rise in net demand of all the asset classes, with a 12% uptick in demand for hedge fund allocations, compared to a 3% decline last year.
- The top three hedge fund strategies that institutional investors are looking to for the second half are long or short equities, global macro-discretionary, and quantitative strategies. Fixed-income arbitrage strategies are no longer in the top five strategies these investors prefer.
- Region-wise, 47% of the investors were interested in “developed Europe,” 47% in North America, and 57% interested in global strategies. Interest in “developed Europe” is picking up, after falling off in the wake of the Brexit vote last year. Looking at opportunities in specific countries, India was of most interest to these investors.
- Of the investors who redeemed their hedge fund holdings in the first half of the year, a good 87%, compared to 82% in 2016, expect to redeploy the money into other hedge funds, rather than allocate them to other asset classes.
- There was also a higher level of interest in “alternate vehicles”, led by “co-investments” and “risk premia,” as well as an uptick in interest in “long-only” funds.