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After Years in the Dog House, Hedge Funds Are Regaining Investor Favor

Two-thirds of allocators are satisfied with hedge fund performance, but few plan to up their capital commitments.

  • By Amy Whyte

For the first time since 2016’s rash of hedge fund redemptions, there are more investors happy with hedge fund performance than unhappy.

Roughly two-thirds of institutional investors surveyed by alternatives data firm Preqin said their hedge fund investments had met or exceeded their expectations over the twelve months ending in June.

Although investor satisfaction with hedge funds still trails that of other popular alternative asset classes like private debt and real estate – each boasting performance approval ratings of 91 percent – it’s up sharply from two years ago, when 79 percent of investors said their investments had fallen short of expectations.

But despite improving attitudes toward hedge funds, more investors are planning to downsize their allocations than increase them. Just under a fifth of allocators surveyed by Preqin said they would invest less capital in hedge funds over the next twelve months, compared to 16 percent aiming to allocate more.

The survey results echoed recent fund flow patterns captured by industry tracker HFR. During the second quarter, investors redeemed $3 billion more than they invested, the data firm said. 

[II Deep Dive: Investors Pull Back From Hedge Funds]

Still, the tide could turn: Investors surveyed by Preqin were confident about future hedge fund returns, with 32 percent expecting performance to improve and 51 percent believing it would stay roughly the same. 

Investors “perceive several benefits of hedge funds,” according to Amy Benstead, Preqin’s head of hedge funds. These included diversification, low correlation to other asset classes, and high risk-adjusted returns, she said in a statement.

Last year, hedge funds produced an industry-wide gain of 8.59 percent, based on HFR’s hedge fund composite index. According to Preqin, the average investor targets a 7 percent return from their hedge fund portfolio.

Hedge funds have had a rocky start this year, thanks to volatile equity markets, and were up by 1.45 percent at the end of July.

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