hedge fund performance

Report: Hedge Fund Assets Will Continue Growing in 2015, But Executives Recognize Underperformance

A new survey, released Tuesday by Deutsche Bank, reveals that hedge fund executives expect hedge fund assets to grow by 7 percent and exceed $3 trillion in 2015, including $60 billion of net inflows.

But the majority of executives and investors surveyed – 66 percent – also recognized that hedge funds underperformed in 2014.

From the Wall Street Journal:

Investors included in the survey had on average expected returns of 8.1%, but said they only got returns of 5.3%.

[…]

However, some investors are planning to invest more in hedge funds, despite last year’s lackluster returns.

The survey said 39% of investors plan to increase allocations to hedge funds this year, including 22% who expect to increase the size of their allocations by $100 million or more.

Other key findings from the survey, from a Deutsche Bank press release:

Investors are looking for steady and predictable risk-adjusted returns – Investors risk/return expectations for traditional hedge fund products continues to come down in favor of steady and predictable performance: only 14% of respondents still target returns of more than 10% for the hedge fund portfolio, compared to 37% last year.

With this in mind, however, 40% of respondents now co-invest with hedge fund managers as a way to increase exposure to a manager’s best ideas and enhance returns. 72% of these investors plan to increase their allocation in 2015.

Investors see increasing opportunity in Asia – 30% of hedge fund respondents by AUM plan to increase investment in Asian managers over the next 12 months, up from 19% last year. Even more noteworthy is the growing percentage of investors who see opportunity in China, up to 25% from 11% by AUM, year-on-year. India is expected to be a key beneficiary of flows, with 26% of investors by AUM planning to increase exposure to the region, whereas only 4% said the same last year.

Photo jjMustang_79 via Flickr CC License

How Hedge Funds Keep Winning Clients Despite Prolonged Slump

The average hedge fund has returned 5.1 percent annually over the last 10 years, according to HFR, a hedge fund data firm.

The investment vehicle has even been outperformed by many “balanced” mutual funds. But the flow of clients to hedge funds isn’t slowing down, which begs the question: how do hedge funds keep winning clients when performance is so paltry?

Gregory Zuckerman dives into that question and comes up with some interesting answers:

How to explain the paradox of a superhot investment vehicle producing ice-cold returns for clients more smitten than ever?

Part of the reason for the lackluster returns: Hedge funds don’t have the same incentive to hit home runs they once did. They can charge management fees of close to 2% of assets. As the industry swells, many managers can get rich just keeping their funds afloat. A decent performance and no huge loss will do just fine.

The head of one of the world’s largest funds recently told me his challenge is to get his traders to embrace more risk, not less. Hedge-fund traders are more conservative because it’s in their self-interest to be more conservative.

There are similar ways to explain why hedge-fund clients aren’t up in arms. Some see an expensive market and want to be in a vehicle that should do better in a downturn.

But others simply want to keep their jobs. Recommending low-cost balanced mutual funds can be hard to justify if one has a well-paid job at a big pension fund or endowment. Properly allocating money to hedge funds is seen as a bigger challenge. Investing in brand-name hedge funds instead of big stocks once might have put an institutional investor’s career on thin ice. Today, avoiding popular hedge funds to wager on the market is seen as a risky career move.

Preqin: Hedge Funds Grew More Than Any Alternative in 2014

Hedge funds experienced the most asset growth of any alternative asset class in 2014, according to a Preqin report.

Despite scrutiny over low returns and high expenses, investors put more money into hedge funds in 2014 than private equity, infrastructure or venture capital.

Research Firm: Institutional Investors Still Hungry for Hedge Funds

Research from eVestment indicates institutional investors are still hungry for hedge funds even after a year that saw low returns for the investment vehicles. The research estimates that investors will put at least $90 billion in hedge funds in 2015.

From Money News:

Wealthy investors are poised to put at least $90 billion into hedge funds next year, even after returns have largely been lackluster this year, research firm eVestment said.

Fresh demand from pension funds, endowments, and insurers looking for alternatives to traditional stock and bond holdings will fuel next year’s flows, the researchers wrote in a report.

“Will institutional investors maintain their investments and continue to allocate more to hedge funds in 2015 … The short answer is yes,” they wrote, adding “We expect asset flows into hedge funds of at least between $90 billion and $110 billion in 2015.” Hedge funds manage roughly $3 trillion in assets.

The appetite for hedge funds remains strong even after the $300 billion California Public Employees’ Retirement System, the largest U.S. pension fund, said in September it was pulling out of hedge funds because they are too costly and complicated.

Hedge funds took in roughly $112 billion in new money this year even though returns have been paltry, with the average fund returning roughly 4 percent this year through November. As hedge funds posted low single digit returns, the stock market raced to a series of fresh highs and the Standard & Poor’s 500 index gained 12.8 percent since January. Last year, investors added $62 billion in new money to hedge funds.

The research suggested that investments in stock-oriented hedge funds could slow down, but investments in multi-strategy hedge funds will likely rise in 2015.

Photo by 401kcalculator.org

Public Pension Hedge Fund Portfolio Returns vs. Benchmarks in 2014

Here’s a chart listing the strongest-performing hedge fund portfolios over the 12 month period ended September 30, 2014.

You can also see whether or not the portfolio outperformed its benchmark, and the percentage of system assets dedicated to hedge funds.

Chart credit: Pensions & Investments

Report: Institutional Investors Plan to Increase Private Equity, Decrease Hedge Fund Allocations in 2015

A Coller Capital report released Monday showed two strong trends in institutional investor sentiment.

Forty percent of investors are planning on increasing their allocations to private equity in 2015. Meanwhile, 33 percent of those same investors said the see themselves decreasing their hedge fund portfolios.

Surveys: Institutional Investors Disillusioned With Hedge Funds, But Warming To Real Estate And Infrastructure

Two separate surveys released in recent days suggest institutional investors might be growing weary of hedge funds and the associated fees and lack of transparency.

But the survey results also show that the same investors are becoming more enthused with infrastructure and real estate investments.

The dissatisfaction with hedge funds — and their fee structures — is much more pronounced in the U.S. than anywhere else. From the Boston Globe:

Hedge funds and private equity funds took a hit among US institutions and pension managers in a survey by Fidelity Investments released Monday.

The survey found that only 19 percent of American managers of pensions and other large funds believe the benefits of hedge funds and private equity funds are worth the fees they charge. That contrasted with Europe and Asia, where the vast majority — 72 percent and 91 percent, respectively — said the fees were fair.

The US responses appear to reflect growing dissatisfaction with the fees charged by hedge funds, in particular. Both hedge funds and private equity funds typically charge 2 percent upfront and keep 20 percent of the profits they generate for clients.

Derek Young, vice chairman of Pyramis Global Advisors , the institutional arm of Fidelity that conducted the survey, chalked up the US skepticism to a longer period of having worked with alternative investments.

“There’s an experience level in the US that’s significantly beyond the other regions of the world,’’ Young said.

A separate survey came to a similar conclusion. But it also indicated that, for institutional investors looking to invest in hedge funds, priorities are changing: returns are taking a back seat to lower fees, more transparency and the promise of diversification. From Chief Investment Officer:

Institutional investors are growing unsatisfied with hedge fund performance and are increasingly skeptical of the quality of future returns, according to a survey by UBS Fund Services and PricewaterhouseCoopers (PwC).

The survey of investors overseeing a collective $1.9 trillion found that only 39% were satisfied with the performance of their hedge fund managers, and only a quarter of respondents said they expected a “satisfying level of performance” in the next 12-24 months.

[…]

The report claimed this showed a change in expectations of what hedge funds are chosen to achieve. Investors no longer expect double-digit returns, but instead are content to settle for lower fees, better transparency, and low correlations with other asset classes.

Mark Porter, head of UBS Fund Services, said: “With institutional money now accounting for 80% of the hedge fund industry, they will continue seeking greater transparency over how performance is achieved and how risks are managed, leading to increased due diligence requirements for alternative managers.”

Meanwhile, the USB survey also indicated investors are looking to increase their allocations to infrastructure and real estate investments. From Chief Investment Officer:

“Despite the challenges of devising investment structures that can effectively navigate the dynamic arena of alternative markets, asset managers should remain committed to infrastructure and real assets which could drive up total assets under management in these two asset classes,” the report said.

“This new generation of alternative investments is expected to address the increasing asset and liability constraints of institutional investors and satisfy their preeminent objective of a de-correlation to more traditional asset classes.”

The report noted that despite waning enthusiasm for hedge funds, allocations aren’t likely to change for the next few years.

But alternative investments on the whole, according to the report, are expected to double by 2020.