Worldwide, hedgies wait for new mandates

Big institutional investors around the world are cautiously investing more capital in hedge funds over the next 12 months, with a view to increasing allocations over the longer term, according to a survey by the alternatives research firm Preqin. Preqin, which has offices in London and New York, surveyed 50 of the largest institutional investors in hedge funds during July and published a summary report in August. The report indicated a modest increase in support for hedge funds this year, with a more significant increase in later years. Clearly the possibility of a doubledip recession is weighing on the minds of investors in Europe and the US, as perhaps elsewhere. For hedge fund managers, the experience of the past two years of the global financial crisis caused them to become more reliant on institutional investor support, rather than its traditional base of high-net-worth individuals.

This requires greater transparency and more detailed reporting by the managers. The Preqin survey results show that 26 per cent of big investors were below their target allocation to hedge funds and would be looking for new investment opportunities over the next 12 months. Asked to say whether they will be allocating more, the same, or less in the next 12 months, only 15 per cent said “less’, 56 per cent ‘the same’ and 29 per cent ‘more’. Most – 53 per cent – intended to maintain the same number of hedge fund relationships, but another 37 per cent said they would likely increase the number of relationships, indicating a strong uptick in new mandates. Over the longer term, 46 per cent of respondents planned to increase their hedge fund allocations in the next three-to-fiveyear period, which is a significantly higher proportion than over the next 12 months. The survey results also showed that investors were generally satisfied with the performance of their hedge fund investments over the past 12 months, with 69 per cent saying that they either met or exceeded expectations.

Nevertheless, a worrying 31 per cent felt that their hedge fund managers had fallen short of expectations in that time period. In terms of preferred hedge fund strategies, long/short equities is the standout, followed by global macro. Preqin said it was not surprising, given the current economic climate, that investors were seeking to invest in such liquid hedge fund strategies rather than less liquid ones. According to the report: “While credit and distressed securities/ debt are still popular strategies (ranked third and fourth), none of the surveyed investors favoured funds-of-hedge-funds. “Those that have been investing in hedge funds for a while tend to move away from this type of fund as they become more familiar with the asset class, preferring to invest directly instead.