The majority of hedge fund investors are satisfied with their returns and will continue to allocate to these vehicles over the next year, as a new Preqin survey finds that these investors are significantly more interested in these vehicles for reasons other than high returns.
Overall, 82% of the 100 institutional investors from around the world surveyed by Preqin said they seek hedge fund returns of between 3-6%, with 5% being the most popular answer (30% of investors). Only 6% of investors seek 10% or more in returns. These figures are a result of most investors wanting hedge funds to produce returns uncorrelated to equity markets (59% said this is a key objective), produce robust risk-adjusted returns (53% of investors) and dampen portfolio volatility (46% of investors).
Due to these expectations, and the fact that hedge funds produced a net return of 7.87% over the last 12 months, 84% of investors surveyed feel their hedge fund return expectations have been met or exceeded during this timeframe. And at least 95% of investors feel hedge funds have met their key objectives over a 12-month, 3-year and
5-year period.
“Investors are the most satisfied with returns they have ever been, with hedge funds having largely lived up to investors’ expectations on an absolute and risk-adjusted basis over the short, medium and longer term. The amount of money they invest in hedge funds has increased over recent years and is likely to grow significantly in the years to come. Hedge fund managers looking to raise capital from these investors need to market the positive impact that their vehicle can have on an investor’s portfolio outside of returns in order to attract an increasingly sophisticated investor base,” says
Amy Bensted, head of hedge funds products at Preqin.
Over the next 12 months, 87% of hedge fund investors plan to maintain or increase their allocations to the vehicles, as 80% said portfolio risk would increase if they stopped investing in hedge funds. On the other hand, respondents said the top three barriers to investing in hedge funds are the difficulty to source good funds (23%), fees (22%), and complexity (21%).
Still, going forward, more hedge funds will have a chance to grab a slice of the pie, as 17% of investors said they definitely plan to increase the number of funds they invest in, and 28% are considering it. Over a three-year horizon, those numbers change to 20% and 17% respectively.
Lastly, there could be opportunities to create more specific benchmarks, as 51% expressed concerns that aggregating performance is irrelevant, while 36% said that hedge fund specific benchmarks are unreliable. Overall, 63% said they use a hedge fund specific benchmark, and the preferred method, stated by 36%, is to use different benchmarks for separate strategies in hedge fund portfolios.
“[T]he frequent, broad comparisons of hedge fund performance to standard market indices, such as the S&P 500, are generally viewed as irrelevant by the institutions making the investments and judging their success, as these indices do not reflect the diversity of the hedge fund industry or its risk/return characteristics,” says Bensted.
Most Hedge Fund Investors Do Not Expect High Returns, Finds Preqin
The majority of hedge fund investors are satisfied with their returns and will continue to allocate to these vehicles over the next year, as a new Preqin survey finds that these investors are significantly more interested in these vehicles for reasons other than high returns.
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