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Are Hedge Funds Due for a Comeback?

Barclays’ annual industry outlook forecasts a return to net inflows – but Preqin offers a less rosy perspective.

In 2016, investor dissatisfaction with high fees and low returns resulted in the hedge fund industry’s first year of net redemptions since the financial crisis. But in 2017, hedge funds might be making a comeback – at least according to Barclays.

The investment bank’s annual global hedge fund industry outlook predicts $10 billion of net inflows this year, based on a survey of about 350 institutional investors representing $7.3 trillion in assets under management. Last year, Barclays reported that hedge funds suffered net outflows of $70 billion – more than double the $30 billion the bank forecast at the outset of 2016. Other industry watchers, such as data firms Preqin and eVestment, calculated net redemptions of more than $100 billion in 2016.

Still, overall assets under management grew slightly last year, as positive performance outweighed the outflows. This year, Barclays expects the assets to continue to grow as investors make $290 billion in gross allocations, with roughly half of the capital coming from pensions and sovereign wealth funds. The estimate comes from the bank’s survey, which found that 48 percent of investors planned to increase hedge fund commitments – up from 33 percent last year.

Preqin, however, offered conflicting results from its own survey of 150 investors, reporting that 38 percent of respondents intended to decrease hedge fund allocations this year, compared to 20 percent who planned to up their commitments. According to Preqin, continued outflows from hedge funds are “likely” in 2017, though certain strategies, such as relative value, are expected to bring in more assets.

“Fundraising challenges of the past year show little sign of abating in 2017,” said Amy Bensted, head of hedge fund products at Preqin. Both surveys, however, showed that investors are continuing to push for better terms – and succeeding. Preqin’s poll found that 58% of investors saw an improvement in terms and conditions over the course of 2016, with 55% reporting better management fees.

Barclays, meanwhile, reported that 45% of respondents to its survey had successfully negotiated fee discounts over the last 24 months. At least a third of investors reported lower fees for every hedge fund strategy, while the biggest investors – with hedge fund portfolios larger than $5 billion – received lower fees for every strategy the majority of the time.

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