Hedge funds in Asia and Europe may be in line for a rise in allocations by institutions, while North American strategies may see stagnant inflows, indicates an Ernst & Young survey.
Institutional investment in hedge funds is expected to remain largely static in the next three years, with only 17% of respondents planning to increase allocations in the coming three years, compared to 72% who intend to maintain the same exposure and 11% who will reduce theirs.
They cite fees and poor performance as the biggest obstacles to making larger allocations to the asset class, according to E&Y’s report, Exploring Pathways to Growth. It polled 100 hedge funds across Asia, Europe and North America that collectively manage $850 billion, and 65 institutional investors that allocate a combined $190 billion to the asset class.
Allocations in the near term will likely favour Asian and European hedge funds, says E&Y. Asian managers pulled in an average of 25% total net flows as a percentage of assets, while the figure for European funds was 10%.
Only 1% of North American managers experienced net inflows last year, with nearly half coming from new clients. “[It] suggests that there is no net new investment in managers in North America, but rather a reallocation among managers as the competition for capital intensifies,” notes the report.
E&Y attributes growing allocations to Asia as a result of greater interest in gaining exposure to growth markets, while “investors have begun to reinvest in Europe after an exodus during the past couple of years”.
This is evidenced in the record level of assets in Greater China-focused funds, which stands at $12.9 billion, according to Eurekahedge figures released this month.
Discussions with Asia-based managers with less than $100 million in AUM by AsianInvestor indicates that there is growing investor interest for strongly performing strategies, particularly from funds of hedge funds and European family offices.
One factor may be that Asian managers are more flexible in offering investors a customised solution – such as lower fees and separately managed accounts – for smaller mandates. Eighty-seven percent were willing to do so for an allocation of less than $50 million, while only 30% of European and 21% of North American managers would do the same.
However, Western managers said they would offer customised terms for larger capital commitments, with 45% of US hedge funds doing so for an allocation of more than $100 million, and 50% of European strategies for an investor committing between $50 million and $100 million.