Hedge Funds Are Starting to Win Over Allocators Once Again

Three years ago, institutions were moving away from hedge funds. That trend is starting to reverse, according to AIMA.

Michael Nagle/Bloomberg

Michael Nagle/Bloomberg

There’s nothing like a good dose of volatility to get allocators once again thinking about hedge funds.

Investors had hedge funds on their minds well before the market rout this year. About half of U.S. allocators plan to increase their investments in hedge funds in 2022, according to the latest report by the Alternative Investment Management Association. In December, the group surveyed 224 allocators across the country, with 49 percent working at foundations and endowments, 15 percent at public pensions, and 11 percent at family offices. While private equity remains the top choice of investors, hedge funds have begun to attract some attention again, according to the AIMA report.

“Three years ago, many institutions were indeed adjusting their alternatives portfolios away from hedge funds. And often doing so vocally. They were making space for larger allocations to the likes of private credit and real assets,” the report said. “While the trend toward illiquid opportunities remains, we anticipate some positive changes with a renewed focus on hedge funds this year.”

In 2021, according to AIMA, hedge fund net flows reached $25 billion, compared with outflows of $15 billion in 2020 and outflows of $17 billion in 2019. Family offices, foundations, and endowments were the top investors in hedge funds, according to the report. Sixty-two percent of family offices, 55 percent of foundations and endowments, and 50 percent of corporate pensions intend to increase their hedge fund investments in 2022. Only 26 percent of public pensions plan to do so, however.

Many hedge fund strategies are designed to be safer bets than traditional equities, and provide protection amid market volatility. Forty percent of respondents have expressed concerns over equity valuations, and 35 percent want to use hedge funds as part of their allocation to public equities. “2021 proved challenging for alpha, particularly in the long-short equity space,” said Nat Kellogg, the president of Chicago-based investment consultant Marquette Associates, about the AIMA report. “But we think that the year ahead is likely to be a little bit more exciting.”


Long-short funds are the most popular hedge fund strategy among allocators. According to the report, 31 percent of all respondents are interested in long-short hedge funds, 30 percent are targeting multi-strategy funds, and 19 percent each are leaning toward arbitrage and event-driven strategies.

“For institutional investors, increased appetites for long-short equity investments are borne out of lingering geopolitical tensions and the coronavirus pandemic — these global issues have distorted valuations and created challenges around traditional asset investing,” the report said.

Nine percent of U.S. allocators plan to increase their exposure to hedge funds that invest in the Asia-Pacific region, according to AIMA, followed by 7 percent who are targeting hedge funds that invest in Europe. “Hedge fund allocations will flow from U.S. foundations/endowments and family offices to global and North American long-short equity and multi-strategy funds,” the report concluded. “More broadly, anecdotal evidence suggests that other strategies and, in particular, Asia-Pacific funds, are also well placed.”