Hedge funds largely fell short of investor performance
targets last year even as allocators scaled back return
Two-thirds of investors surveyed by J.P. Morgan said they
set a return target of below 10 percent for their hedge fund
portfolios in 2016, an increase from the 46 percent who did so
in 2014. Yet returns continued to disappoint, with
three-quarters of respondents reporting that hedge funds did
not meet their return targets last year, up from two-thirds in
The latest edition of the annual survey collected responses
from 234 institutional investors including pensions,
endowments, and funds-of-funds who invest a combined
$750 billion in hedge funds. The survey found that
disappointing performance remained the primary cause of hedge
Of investors surveyed, 80 percent withdrew from at least one
hedge fund in 2016. Three-quarters of these respondents cited
performance as the reason, while just over half wanted to
reduce their exposure to a particular strategy.
Hedge funds as an industry earned 5.57 percent in 2016,
according to the HFRI Fund Weighted Composite Index. The
Standard & Poors 500 stock index, by comparison,
gained 11.23 percent.
Roughly a third of investors attributed the low returns to
crowding specifically, too many managers chasing the
same limited trading opportunities. Just under a quarter said
underperformance was likely the result of macroeconomic
Still, 67 percent of investors said they planned to maintain
their allocation to hedge funds in 2017, while an additional 20
percent intended to invest more in the asset category.
Three-quarters said they would reallocate to different
managers, while roughly half planned to switch up the
strategies they invested in. Global macro, distressed credit,
and fundamental long-short equity were chosen as the top three
strategies most likely to outperform this year. Across the
board, investors said they expected fees to decrease in 2017,
with 90 percent of respondents anticipating lower fees
up from 60 percent in 2016 and 2015. Over the course of last
year, 40 percent of investors said they had negotiated fee
rates with hedge fund managers.
Few still paid the traditional 2-and-20, with 94 percent of
respondents paying an average management fee of below 2
percent. More than 80 percent said their performance fees
averaged below 20 percent.
In addition, 57 percent of respondents predicted higher
implementation of hurdle rates by hedge fund managers in 2017,
while 40 percent expected improvements in transparency.