Demand for Hedge Funds Is Rising. These Are the Strategies Investors Like Most.

Health-care strategies and private market hedge funds are catching allocators’ eyes, according to a new Credit Suisse survey.

Alex Kraus/Bloomberg

Alex Kraus/Bloomberg

Demand for hedge funds is on the rise, as a large portion of allocators are finding that their investments in the alternative vehicles are meeting or exceeding expectations.

This is according to a Credit Suisse survey of allocators published on Tuesday, which found that higher volatility and more stock dispersion have made hedge funds more attractive to investors after several years of low investor demand.

The bank surveyed 201 institutional investors with roughly $812 billion in hedge fund investments from late December 2020 through mid-February 2021. Family offices made up the largest category of respondents, representing 27 percent, while fund of funds accounted for 25 percent.

According to Credit Suisse, the net demand for hedge funds has risen significantly in recent years. The bank measured this by subtracting the proportion of allocators that were decreasing their investments in hedge funds from the percentage that were increasing their hedge fund exposure. In the most recent survey, that net demand was 52 percent. This is compared to 39 percent in 2020, and just 12 percent in 2017.

Today’s markets, with higher stock return dispersion, lower stock correlation, and elevated market volatility make active strategies more attractive to investors, Credit Suisse said.


There’s also a stronger performance track record to bolster demand.

An all-time high of 88 percent of survey respondents said their hedge fund allocations met or exceeded their performance expectations. Additionally, 95 percent of respondents said they are recycling redeemed capital back into hedge funds. This has been on the rise since 2016 when just 82 percent said they would do so.

Meanwhile, target returns for 2021 have reached a 12-year high, clocking in at 11.2 percent, according to the survey. Investors earned nearly that much in 2020, with respondents reporting an average return of 11 percent.

Still, some hedge fund strategies are attracting more investors than others.

According to Credit Suisse, equity healthcare strategies have the highest net demand right now at 44 percent. This is a 23 percent increase year-over-year. The strategy is particularly popular among endowments, foundations, and family offices, the data shows.

“Investors indicated continued strong interest in equity-oriented strategies, particularly around sector and regional specialists,” Jaynita Sodhi, head of Credit Suisse Capital Services Americas, said in a statement.

Convertible bond arbitrage strategies, by comparison, were the least attractive to investors, with just 17 percent in net demand, the survey showed.

[II Deep Dive: These Were the Best-Performing Hedge Fund Strategies in 2020]

Meanwhile, more than half of allocators reported that they are using hedge funds to access private markets, with family offices, foundations, and endowments leading the way. Credit Suisse said that a significant portion of allocations over the past 12 to 18 months — 61 percent — went to non-traditional structures, including private market investments as well as customized offerings like managed funds and co-investments.

“We’ve seen an uptick in demand from LPs to access private markets through hedge funds, given a manager’s ability to apply the breadth of their public markets investing acumen to private opportunities,” said Joseph Gasparro, head of content for Credit Suisse Capital Services Americas, in a statement. “Privates also allow managers to engage with next-generation companies that could be disruptive to publicly-traded peers.”