Hedge funds – Feature
Hedge funds are back. After a dramatic fall from grace, the picture for the asset class looks positive again. While, selloffs in 2019 and 2020 saw hedge funds report outflows of $17bn (£13bn) and $15bn (£11.4bn), respectively, according to the Alternative Investment Management Association (AIMA). Investors flooded back a year later as net flows reached $25bn (£19bn).
Breaking this down, family offices, foundations and endowments were the top investors in hedge funds. Moreover, 62% of family offices, 55% of foundations and endowments, and half of corporate pension schemes plan to increase their exposure to hedge funds in the year ahead. In comparison, 26% of public pensions intend to do so.
“Three years ago, many institutions were indeed adjusting their alter- natives portfolios away from hedge funds. And often doing so vocally. They were making space for larger allocations to the likes of private credit and real assets,” AIMA’s report read. “While the trend toward illiquid opportunities remains, we anticipate some positive changes with a renewed focus on hedge funds this year.” Predictably, on-going market uncertainty is helping to drive this. AIMA observes that investors have expressed concerns over equity valuations, with 35% wanting to use hedge funds as part of their allo- cation to public equities. Another investor survey, conducted by BNP Paribas Asset Manage- ment, revealed that assets in multi-strategy funds are expected to enjoy the second-highest level of inflows of any strategy this year, behind funds betting on specialist equity sectors, such as healthcare. On this picture, investors are expected to have met an average return target of 8.3% for their 2021 hedge fund portfolios – an impressive number. As a result, more than half of the capital allocators surveyed plan to increase their hedge fund exposure by an average of $244m (£186.4m) this year, presenting a picture of real momentum heading into the asset class.
The long and the short of it Asset owners and hedge funds have not always been natural bedfel- lows, but this is changing. Growing numbers are turning to hedge funds, given the macroeconomic uncertainty. A key example is almost half of US asset owners intending to increase their investments in hedge funds this year, AIMA says.
Based on this analysis, long-short funds are the most popular hedge- fund strategy among asset owners followed by multi-strategy funds, then arbitrage and event-driven strategies. These range of hedge funds, show how asset owners can use them for their own purpose. “These types of strategies have the ability to provide strong risk-ad- justed returns with a low correlation to traditional asset classes,” says Joe McGuane, head of hedge fund research at California-based con- sultancy Callan. “They all have the ability to generate returns that are somewhere between equities and fixed income. They also have the ability to provide downside protection in times of stress for broad
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