Despite Tough Quarter, Institutions Plan to Increase HF Allocations

While almost a third of institutional investors plan to increase hedge fund investment over the next year, fewer investors are satisfied with hedge fund performance compared to last year.

(August 10, 2010) — Institutional investors have reported waning confidence in hedge funds, which have suffered dwindling inflows in recent months, but new research by Preqin reveals investment in the asset class is beginning to accelerate.

“Despite a slight drop in investor satisfaction in hedge fund returns over the past 12 months, institutional investors are beginning to invest more capital in hedge funds in greater numbers than they were a year ago,” said Preqin’s Hedge Fund Data Manager Amy Bensted in a statement. “It is clear that institutional investors still believe hedge fund investments are a valuable part of their portfolios.”

Nearly a third of pension funds and other institutional investors plan to up their allocations to hedge funds over the next year, Preqin’s research showed. The research firm’s survey studied 50 hedge fund investors worldwide and found that 29% aim to allocate a greater percentage of capital to the asset class over the next 12 months. On the other hand, 56% intend to keep their exposure at the same level. Fifteen percent plan to reduce their hedge fund holdings in the $2 trillion industry.

Meanwhile, reflecting a slight drop in confidence, 69% of investors reported feeling the hedge funds within their portfolios have either met or exceeded return expectations, a decrease from 73% of investors surveyed in 2009.

Over the longer 3- to 5-year term, 46% of surveyed investors intend to up their exposure to hedge funds.

The news comes as hedge fund returns have continued to drop in 2010 as concerns that the sovereign debt crisis in Europe may thwart a global economic recovery have persisted this year, following 2009’s strong year, when hedge funds returned an average 20%. The asset class lost an average of 0.5% in June after losing 2.6% in May, with the overall sector posting a negative 0.02% for the current year, according to the Eurekahedge Hedge Fund Index, which measures the performance of more than 2,000 funds worldwide.

Yet, according to Preqin, the results of the survey suggest modest flows into hedge funds for the rest of 2010, with a “more significant” increase in commitments from institutional investors coming through 2011.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href=''></a>; 646-308-2742