Institutional investors in the West, including funds of funds, family offices and endowments, and pension funds, are prepared to increase allocations to hedge funds, particularly to new managers.
Concept Capital, a New York-based broker and service provider to hedge funds, surveyed 108 such allocators representing $150 billion in direct hedge fund assets. Most of these invest via segregated accounts of funds of funds, not through mutual fund or Ucit structures.
The bulk of Asia-based hedge fund money comes from the United States and other developed markets.
Concept found 86% of these allocators indicate that they will increase their allocations to hedge funds in 2013 (see chart). This comes despite mediocre 2012 risk-adjusted performance for the asset class. But institutional investors in the West are committed to high return targets, and public securities markets are unable to allow them to meet their objectives, given that interest rates are so low.
Therefore institutional investors continue to turn to alternative investments for alpha.
The Concept Capital survey finds 58% of respondents willing to target managers with less than $50 million in assets under management, while 61% say they are interested in managers with a track record of less than two years.
It is typical in the hedge fund universe for smaller, younger firms to outperform the bigger, more established names.
“This bodes well for the many start-ups of the past couple of years, including those who’ve come out of the proprietary trading desks at the big banks,” notes Concept Capital’s report on the survey.
This should be seen as a positive sign by Asia-based managers, many of whom are struggling with issues of scale. Most respondents say their average minimum investment allocation is $1-5 million, although a third want to write tickets in the $5-10 million range and 9% want bigger allocations. The survey did not consider investments based on geography, however.
Investors indicate an interest in equity-related strategies, suggesting hedge funds focused on long/short global or US equities, multi-strategy equity, and event-driven/special situations will have a better shot at raising capital.
The survey also finds allocators most likely to prefer hedge funds that provide better transparency, sensible redemption terms that don’t impose gates or long lock-up of capital, and lower fees.