After Hedge Funds’ Mediocre Year, Investors Still Want More

Downturn fears are fueling interest, Preqin data show.

Illustration by II

Illustration by II

Despite their flagging performance, hedge funds are poised to be an important part of institutional investors’ asset allocations in 2019, a new report from Preqin shows.

Hedge funds collectively lost 3.41 percent in 2018, their worst annual performance in nearly a decade, according to the data provider’s report, published Tuesday. But a majority of investors nevertheless plan to maintain or increase their hedge fund allocations in 2019 in anticipation of an economic downturn.

“While we never know in real time precisely where we are in the economic and market cycle, it is quite clear that the environment is changing: we are at best in the late stages of a decade-long expansion, asset valuations are stretched and economic growth in most places is weakening; all of which are compounded by growing protectionism and ‘trade wars,’” the report explained.

Nearly one in six investors surveyed said they believe the equity cycle has reached its peak. “With indications of an imminent market correction, the ability of hedge funds to protect investors in the event of a downturn may never be more important,” according to Preqin.

To cope with the expected downturn, 79 percent of investors anticipated maintaining or boosting their hedge fund books in the next 12 months, according to Preqin. This is the largest proportion of investors since 2014 that planned to do so, according to the report. While investors are not expected to allocate massive amounts of fresh capital, they are rebalancing their portfolios toward hedge fund strategies.

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Macro strategies emerged at the most popular strategy type: 29 percent of surveyed investors said they planned to increase their exposure to the category, the report said.

Investor’s enthusiasm was coupled with disappointment. According to Preqin, 55 percent of investors surveyed felt let down by hedge fund performance last year .

“If investors’ fears of a market correction prove true, 2019 will certainly be a time for hedge funds to prove their worth,” the report said.