Hedge Funds: Winning Hearts and Assets in 2013

Investors have never been more pleased with the performance of their hedge funds.

(December 20, 2013) — Hedge fund performance has impressed investors like never before, and they have been rewarded with massive inflows this year, research has shown.

In 2013, the proportion of investors who felt their return expectations had not been met fell to its lowest level since data monitor Preqin began recording data, the company said. This was in noticeable contrast to the two preceding years when dissatisfaction was widespread amongst institutional investors, Preqin said.

Some 21% of institutional investors responded to a November survey by Preqin to say that hedge fund returns had exceeded their expectations so far in 2013, with a further 63% saying their expectations had been met. Just 16% responded to say their expectations had not been met, marking a large decrease from 41% holding the same view last year. In 2012, just 3% of investors said their hedge fund investments had exceeded their expectations.

And this type of performance has been compensated. Flows into hedge funds were positive for a fifth consecutive month in November, according to data from eVestment. New allocations of $15.3 billion brought the five-month total of inflows to $68.5 billion.

“At the start of 2013, we predicted that a need for solid performance and regulation would be key issues for hedge funds in 2013,” said Amy Bensted, head of hedge fund products at Preqin. “Certainly the year has proven both of these predictions to be true, and in terms of performance it appears that many hedge fund managers have fared well this year, and investors are largely satisfied with how the industry has performed.”

As a group, hedge funds posted a 10.04% return in the 11 months to the end of November, Preqin said. A year earlier, they had managed 8.24% in the same period.

Some strategies have fared better than others. Macro strategies returned 1.87% in the first 11 months of the year, which was rapidly out-paced by Japanese yen-denominated funds, which—mainly due to currency and economic reasons—made 21.61%.

However, despite being pleased with annual results, institutional investors were increasingly concerned with long-term performance and managing risk within their portfolios, Preqin said.

Some 29% of investors said they demanded absolute returns from their hedge fund managers, but consistency of results was noted as the top priority for 28% of respondents and 25% of them wanting strong risk-adjusted income.

Just 15% of respondents said they wanted returns that were uncorrelated to their equity portfolio.

Related content: The Downfall of John Taylor & The Obsession of John Paulson