Hedge fund flow forecast to hit pre-crisis peak

Asset owners are tipped to pile into hedge funds in 2014 despite their dire performance last year. There's even appetite for less liquid strategies and funds with long lock-ups, research finds.
Hedge fund flow forecast to hit pre-crisis peak

Institutional investor flows into hedge funds globally are set to hit highs not seen since before the global financial crisis, according to a survey of asset owners.

It comes as the survey from Barclays Capital Solutions Group found that among regional institutions, Asian pensions led the pack when it came to hedge fund allocations in 2013, investing $108 billion throughout the year. Private banks followed at $105 billion.

Looking ahead, hedge funds are forecast to receive institutional flows of $80 billion in 2014, the highest level since 2007, marking a rebound for an industry that has been “under a bit of a cloud” since Lehman Brothers filed for bankruptcy in September 2008, the survey finds.

Flows will be led by equity long/short strategies, which the survey predicts will see net inflow of $50 billion this year. Over the past five years, the largest hedge fund firms received most net flows – partially due to the fact that these firms are more institutional, but also because they have produced the best risk-adjusted returns.

Another trend expected this year is a shift in investor appetite towards less liquid strategies and hedge funds with longer lock-ups. It represents an about-turn from the past four years, when investors hurried to the exits only to be confronted by lock-ups and gating options, in some cases.

A desire for riskier assets was also flagged – one $25 billion fund of hedge fund notes that “given big-name managers have underperformed our targets for the past few years, it’s time to dial up risk in 2014”.

Global investable assets hit $82 billion at the end of last year’s third quarter, an 8% increase from year-end 2012. Three-quarters of this comes from institutions and the remainder from private investors.

Out of all institutional investors surveyed – which includes pensions, endowments, foundations, insurers, sovereign wealth funds and their investment consultants – pension, insurers and family offices increased their allocations to hedge funds the most last year compared with two years ago.

Barclays finds that investors are six times more likely to increase allocations to hedge funds in 2014 rather than reduce them.

Interestingly, although half of the participants indicated that HFs in their portfolios had performed worse than expected in recent years, they indicated plans to increase both the number of hedge funds they invest in, as well as their allocations this year.

The survey found 82% expected either to increase or maintain the number of HFs in their portfolio in 2014, while 91% plan either to raise or maintain allocations to HFs.

“Hedge funds have not met our expectations, but we feel that with the right level of diversification, we can create a portfolio that will perform in good times and provide us downside protection in bad times,” a $22 billion private pension says.

An $8 billion public pension adds: “Although hedge funds have not performed as well as we had hoped, we still believe in the product and believe that in the long run it will be the best source of alpha for our portfolio.”

On drivers for poor performance last year, 54% of institutions cited funds taking too little risk and demonstrating poor market timing; 47% claimed there were too many funds chasing limited opportunities; 40% cited macro factors; 28% claimed some funds showcased a limited ability to generate alpha on the short side; and 4% blamed new regulation.

The 220 investor firms in Barclays’ study represent approximately $5 trillion in total AUM, with about $490 billion in hedge funds of December 31.

Some 36% of the investors fell between $1-$10 billion in AUM, with approximately 20% having less than $1 billion and 43% having more than $10 billion, as of year-end 2013.

The results were skewed towards North American institutions, with 57% based there. Thirty-two percent are located in Europe and 11% in Asia and the rest of the world.

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