Institutional investors in hedge funds are expecting the average hedge fund to post a gain of just 5.2 percent in 2015 — but they nevertheless think industry-wide assets will grow at their fastest rate since 2011, according to a new survey.
These investors predict that hedge fund industry assets will grow by 14.4 percent this year, to $3.2 trillion, according to the investor survey, conducted by investment bank Credit Suisse. That would mark the first time the industry has ever cracked the $3 trillion mark, by Credit Suisse’s count. The survey polled some 400 investors representing $1.13 trillion in single-manager hedge fund allocations.
The investors surveyed by Credit Suisse said they think the hedge fund industry’s growth this year will come from a combination of new money as well as performance. Last year investors predicted that industry assets would grow by 12 percent in 2014 and that the average hedge fund would return about 7 percent.
But hedge funds missed even this modest target, with the average hedge fund returning 4.13 percent in 2014, according to Credit Suisse. This is yet another reminder that the industry is no longer where wealthy individual investors go in search of high-octane returns. The majority of hedge fund investors today are institutions seeking low volatility and low correlation with the broader markets.
But do they want these traits at any price? In other words, does performance even matter anymore?
The short answer is yes, says Robert Leonard, global head of Credit Suisse Capital Services, which serves as an intermediary between hedge funds and institutional investors, and leader of the team responsible for the 77-page report, obtained in advance by Alpha. Leonard stresses that every hedge fund tries to meet some sort of benchmark or target return, whether it is the S&P 500, a fixed-income index or some sort of emerging-markets bogey. But what constitututes good performance is in the eye of the beholder.
“Performance matters,” Leonard insists. “Nobody gets a free pass. It differs widely by investor. Some have higher target returns than others.”
Indeed, when the survey participants were asked about the most important factors when selecting a hedge fund, they cited high net returns first, followed by low correlations to their existing portfolios and reduced volatility. Altogether, 98 percent of respondents included net returns among their top three factors. However, some 70 percent of investors did not rank pricey hedge fund fees — seemingly a hot-button issue in the wake of years of mediocre hedge fund performance — as a top three factor.
Nearly half the investors, some 47 percent, said manager underperformance was the key reason when they redeemed from a fund in 2014. By contrast, 23 percent said redemptions were primarily driven by a top-down shift in their strategy preference.
Survey participants also indicated that the strategy they are most interested in this year is global macro, even though macro funds have not fared well for the past few years. Global macro was only the fourth-most-popular strategy cited in last year’s survey. Interest in event-driven strategies, last year’s No. 1–indicated strategy, fell sharply among survey participants.
However, investors who participated in the Credit Suisse survey don’t exactly seem like deft market timers. Last year event-driven funds mostly posted disappointing results. Meanwhile, commodity trading advisers, or managed futures funds, the strategy investors surveyed last year were least interested in, wound up being the best-performing strategy in 2014.
For the second year in a row, investors participating in the survey are most bullish on the European markets, but by a smaller margin this year. This is followed closely by global and Asia Pacific. However, remember that last year most European markets lost money.
Institutional investors also show an interest in start-up funds. The survey found that 68 percent are able to invest in a new fund on day one.
However, in practice these investors are not exactly rushing into new funds. The survey found that virtually all investors require fee discounts or an equity interest in exchange for getting into a start-up fund that early. Just 3 percent are able to invest on day one with no economic incentive deal.
