Hedge Funds Still Struggling to Win Back Investors

Hedge funds protected investors in the first quarter and rebounded in the second — but investor demand for the industry remains low, according to Preqin.

Nathan Laine/Bloomberg

Nathan Laine/Bloomberg

Hedge funds just delivered their best quarterly return in over a decade — but so far investors aren’t rushing to commit fresh capital.

More than two thirds of hedge fund mandates issued by allocators in the second quarter were for investments of $50 million or less, according to Preqin, which tracks alternative investments. “Hedge fund investors were cautious,” the firm said in its second-quarter report on the industry.

The same thing happened in the first three months of 2020, with 67 percent of planned allocations amounting to $50 million or less. But larger mandates became less common in the second quarter, Preqin said.

While about 22 percent of mandates announced in the second quarter were for commitments of at least $100 million, all of them fell below $300 million. In the first quarter, by comparison, about 9 percent of mandates issued by investors were for allocations of $300 million or more.

“Overall sentiment remains low, and new funds in particular face a challenge in convincing investors to take a chance on them,” Christopher Beales, Preqin’s hedge fund spokesperson, said in a statement Tuesday.


[II Deep Dive: Hedge Funds Just Had Their Worst Quarter Since 2009]

This continued reluctance to commit to hedge funds comes as the industry posted its best gains since 2009, during the recovery from the financial crisis. Hedge funds tracked by Preqin averaged returns of 11.48 percent during the second quarter, nearly erasing the losses from the first quarter.

These gains still trailed the S&P 500 index, which jumped by about 20 percent in the second quarter. However, while the S&P 500 was down about 4 percent for the first half of the year, Preqin’s hedge fund index was only down 0.37 percent, thanks to smaller losses during March’s Covid-19 crash.

Still, Beales noted that the recovery was “not equally distributed” across the industry, with many hedge funds “struggling to make gains.”

Based on mandates issued in the second quarter, Preqin said that investors had the most appetite for long-short equity strategies, which featured in 64 percent of fund searches. Other popular strategies included macro and long-short credit funds. According to Preqin 36 percent of mandates targeted long-short credit strategies, up from 23 percent in the first quarter.

Appetite for funds-of-funds, meanwhile, was nonexistent, with the multimanager strategies appearing in none of the second-quarter mandates.