Hedge funds are coming back in style in 2018, according to a new report from Preqin, which said the largest proportion of investors since 2013 are planning to increase their allocations to the asset class this year.
“Having faced an extended period of low investor confidence and net capital outflows, the hedge fund industry is now experiencing a renaissance among institutions,” said Amy Bensted, Preqin’s head of hedge fund products, in a release. “2017 saw the asset class mark four quarters of net inflows, and at the start of 2018, the highest proportion of investors in five years are planning to increase their exposure over the year ahead.”
Bensted said that this may be due to a correction in equity markets, as half of investors now feel that the long bullish phase of recent years is close to ending, adding that in these circumstances, hedge funds “provide a valuable opportunity for portfolio diversification and downside risk protection.”
Macro strategy funds and commodity trading advisors (CTAs) recorded the highest net inflows of any strategy in 2017, according to the report. Macro Strategy funds saw a 5.32% return in 2017, and had net inflows of $19 billion, which resulted in industry assets increasing 8.4% in the 12 months to December 2017 to $1.06 trillion.
CTAs had total net inflows of $25.2 billion, which led to strong growth in assets under management (AUM), despite delivering an annual return of just 2.89%. Aggregate AUM for the strategy grew 13.3% in the 12 months to December 2017 to $284 billion.
Although equity strategies recorded net outflows of $23.8 billion during 2017, their annual performance of 15.32% drove aggregate strategy assets up by 11.6% since the end of 2016 to December 2017. Bensted said that Preqin is already seeing investor search activity for hedge funds rise sharply, as the number of active fund searches has risen by 25% in the past year to reach almost 1,000, while the average size of intended new investments has grown by 40%.
“This is very encouraging for hedge funds, but in such a crowded marketplace they will still need to work hard to attract and retain new investor capital,” she said. “Investor inflows have been concentrated among strong performers and defensive strategies such as macro funds and CTAs.”
The report’s main findings include:
- 46% of hedge fund investors plan to maintain their allocations in 2018, while 27% plan to increase them—the highest proportion that plan to do so since December 2013.
- 45% believe equity markets are at a peak, while 5% believe they are already in a recession phase.
- 37% of investors plan to position their portfolios more defensively in 2018, compared to 10% that plan to position them more aggressively.
- 23% of investors plan to increase their allocations to systematic CTAs in 2018.
- 14% of investors will increase exposure to equity strategies hedge funds, while 16% intend to reduce their allocations in 2018.