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Laxman Pai, Opalesque Asia: Hedge fund performance improved over 2019, but investors are demanding more from hedge funds.
"Performance resurges from 2018, but investors are looking to rebalance their portfolios in what could be a make-or-break moment for the asset class," revealed Preqin Investor Outlook: Alternative Assets, H1 2020.
The +11.45% return of the Preqin All-Strategies Hedge Fund benchmark is one of the highest annual returns in recent years and a significant improvement from -2.00% in 2018.
But investors take a long-term view on hedge fund performance and many remain dissatisfied with returns.
"Among investors, we spoke to in November 2019, 40% still said their hedge fund portfolios fell short of their return expectations. That said, this figure shows that sentiment has improved from 12 months prior (55%), and investors are looking for hedge funds to continue this resurgence in 2020," said Preqin.
And investors are optimistic that performance will continue improving, despite the $97bn of net hedge fund redemptions in 2019.
Four in five (84%) survey respondents are expecting returns in 2020 to match or exceed those of 2020. Reflecting this, 79% of surveyed institutions plan to invest more or the same amount of capital in 2020 as they did in 2019.
Indeed, 28% of respondents that intend to invest more capital is the largest proportion recorded in any end-of-year survey since 2013.
Cautiously optimistic investors do a rebalancing act
"Although most investors expect hedge fund performance to continue its recovery, our study reveals a sense of caution in the wider alternatives space," said Preqin.
Following a year of geopolitical uncertainty and extended economic growth, 61% of all surveyed alternatives investors place us at the peak of the cycle (for the second year running.
Meanwhile, the proportion that is unsure of our positioning has increased to 16%. Among hedge fund investors, a greater proportion (43%) say they are positioning their portfolios more defensively in response to the cycle, up from 37% two years ago.
As such, funds operating relative value strategies and macro strategies are in greater demand in the coming year. More investors indicated plans to reduce their exposure (21%) than increase their exposure (17%) to equity strategies.
The primary barriers to hedge funds' continued performance recovery over 2020 are stock market volatility (44%) and the geopolitical landscape (34%), investors report.
Should the performance of the asset class fall short of expectations when the market cycle is rising, investors may run out of patience with hedge funds.
Similarly, should the market turn, investors will be expecting their defensive investments to offer a protective hedge.
Investors are holding out
Despite their concerns over the prevailing market uncertainty, investors are committed to hedge funds.
Over one-quarter (26%) of surveyed investors plan to increase their allocation to hedge funds in the long term, while a further 54% plan to maintain their allocation.
If fund managers can deliver returns to investors, whether the bull market continues or market conditions change, they will be hoping to reverse the significant withdrawals in 2019.
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