A third of allocators are planning to increase their investments in hedge funds over the latter half of the year, according to a report by HFM and the Alternative Investment Managers Association.

While that figure is a decline from six months ago, when 45 percent of investors said they planned to increase allocations, the appetite for hedge funds remains strong, with investors reporting a greater reliance on global macro and multi-strategy funds to hedge against inflation, according to the report released Thursday.

The report follows the findings of the second quarter Hedge Fund Confidence Index released earlier this week, which showed increased optimism among hedge fund managers about their business prospects over the next 12 months. Of the 108 investors surveyed for this latest report, 80 percent said they were satisfied with hedge funds’ performance for the first half of the year. According to the report, hedge funds as a whole gained 8.9 percent over the six-month period — their strongest start to a year since 2009. 

“Investors saw what hedge funds could do [during the pandemic] and historically,” said Tom Kehoe, AIMA’s global head of research and communications. “Hedge funds are able to navigate the drawdown; they’re best able to manage risks. And there are certain strategies that set out to do that.” 

Big Opportunities in Private Wealth 

Private wealth investors in particular were the most likely to increase their allocations to hedge funds, favoring them over any other alternative asset, apart from private equity. The biggest opportunities are anticipated to come from the Asia-Pacific region, where 46 percent of investors planned to raise allocations; that was followed by 41 percent in Europe and 32 percent from the U.S. 

“These are [coming] from big family offices,” said Kehoe. “They have greater appetite than some of the institutional investors. They would be able to react a little bit quicker than a big institutional investor that would need to go through more of a process in making an allocation.” 

Such investors are allocating to hedge funds that cast a wider net across assets — that is, everything from public equities to private companies, private credit and real estate. 

The report also found greater interest for “bespoke hedge fund products” as investors seek out new opportunities tailored to their needs.

Hedge Funds as Protection Against Inflation 

In addition, the report found that investors were increasingly turning to hedge funds to guard against inflation. Global macro funds were expected to be the biggest beneficiaries, with the largest predicted inflows for the latter half of the year. Long-short and multi-strategy funds were also shown to benefit due to their versatility in a post-pandemic environment. 

Private credit, for its part, continued to attract interest from investors looking to move out of fixed income due to the declining value of future coupons. According to Kehoe, the private credit sector has remained robust as middle-market and small-to-medium enterprises seek out lending support that they’re unable to get from the government. “They need to go beyond what a bank might offer in terms of lending,” he said. “They will go to capital markets and get support there.”