A midyear survey of institutional investors by Credit Suisse found continued appetite to allocate to hedge funds in the second half of 2017 and increased interest in quantitative strategies in the medium term.
The survey also showed that the new alignment discussion continues, with managers employing more limited-partner friendly structures and terms.
Credit Suisse surveyed 212 institutional investors with some $660 billion in hedge fund investments, including pension funds, family offices, consultants, endowments and foundations, private banks and funds of funds. Sixty percent of responses came from the Americas, 22% from Europe, the Middle East and Africa, and 18% from Asia and the Pacific.
Eighty-one percent of investors in the poll said they were likely or very likely to allocate to hedge funds during the second half, up from 73% during the second half of 2016. In particular, 86% of funds of funds, 84% of family offices and 82% of advisors and consultants said they were likely to be active allocators.
Fifty-seven percent of investors surveyed said they were likely to increase allocations to strategies incorporating some quantitative analysis over the next three to five years. This included 67% of pensions and 63% of advisors and consultants.
Some allocators, such as pensions, that showed an appetite for quantitative investment approaches by hedge fund managers may not have been actively investing in this type of investment style in the past, according to Robert Leonard, global head of capital services at Credit Suisse.
“It will be interesting to see how this focus plays out over the next few years,” Leonard said in a statement.
The survey found that realignment of interests in the hedge fund space continues, with hurdle rates, founder’s share class structures and reduced fees for longer lockup now present in two-thirds or more of institutional portfolios.
“Institutional investors continue to realize real progress in the ongoing realignment of interests between hedge funds and their limited partners, with more favorable fee structures and terms being offered by managers,” Leonard said.
“We see this initiative as being in the middle innings of a discussion that continues to evolve across the industry.”
A new study examines whether fledgling hedge funds outperform their established counterparts.
Other Survey Findings
Among asset classes surveyed by Credit Suisse this year, hedge funds experienced the biggest positive swing in net demand, with investors reporting +12% net demand for hedge funds in their asset allocation models, compared with -3% net demand in last year’s survey.
The most significant net demand for hedge fund asset allocations came from advisors and consultants, endowments and foundations and funds of funds.
Net demand for both venture capital and private equity increased by four percentage points, to 14% and 27%, while net demand for real assets fell seven points to 14% and for cash plummeted 22 points to -2%.
A recent report said investor appetite was driving a surge in private equity fundraising.
According to the Credit Suisse survey, 87% of investors that redeemed from hedge funds during the first half said they expected to recycle that capital to other hedge fund managers, rather than allocate to other asset classes, up from 82% in 2016.
Equity long/short, global macro–discretionary and quantitative–equity market neutral/statistical arbitrage were the strategies of most interest to potential allocators in the second half, according to Credit Suisse.
At the same time, investors’ interest in fixed income arbitrage and relative value strategies declined during the first half of this year.
The survey found that investor interest by region was similar to that in the year-earlier survey: global strategies 57%, developed Europe (excluding U.K.) and North America 47% each, and Asia and the Pacific (excluding Japan) 39%.
India was the most frequently mentioned country-specific opportunity.
Master/feeder structures continued to be investors’ favored structure to utilize hedge fund strategies. In the new survey, however, investors showed increased interest in alternate structures.
The most preferred were co-investments, which increased from 8% last year to 17%, and risk premiums, which went up from 10% to 15%.
— Check out The Future of the Investment Management Industry on ThinkAdvisor.