Pandemic Makes Investors Like Hedge Funds Again

For the first time in years, the plurality of investors plan to put more money in hedge funds, not less.

Forty-four percent of hedge fund investors surveyed by Preqin in June said they intended to increase their commitments to hedge funds over the next year — nearly double the proportion from a year ago.

This group far outweighs the 28 percent intending to downsize their hedge fund allocations. These findings mark a sharp change from the last four years, when investors were more likely to lower their hedge fund allocations than raise them.

“Volatile markets have increased appetite for hedge funds,” Preqin said in its mid-year report on alternative assets. 

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Among other alternative investments, only private debt saw a larger increase in investor appetite, with 48 percent of surveyed investors planning to expand their commitments to that asset class.

But nearly half of surveyed investors were disappointed by their hedge fund managers’ performance over the last year. Forty-seven percent said their portfolios had performed worse than expected, while just 6 percent reported exceeding them.

Despite this, investors were more optimistic about hedge funds than they were about any other alternative asset class. Thirty-nine percent predicted that hedge funds would perform better over the next year, compared to 28 percent who thought hedge funds would perform worse.

By contrast, nearly half of investors expected private equity funds to perform worse over the next year, while just 23 percent predicted the opposite. Other alternative assets that investors expected to underperform over the next 12 months included real estate and natural resources.

“Investors believe the most positive prospects are in hedge funds,” Preqin said, but cautioned that this “should be seen in the context of the industry’s disappointing performance over the past 12 months.”

Emerging market hedge funds appeared particularly attractive, with the majority of investors reporting plans to amp up exposure. In addition, half of those surveyed intended to invest more money with emerging managers. Other popular strategies included credit, equity, and macro hedge funds.

Not all managers will benefit from the enlivened enthusiasm: Half of the surveyed investors reported plans to decrease their exposure to funds of funds. Between 31 and 38 percent of investors also planned to decrease their exposure to event-driven hedge funds, systematic CTAs, and multi-strategy funds.