Global institutional investors’ hunt for yield in alternative investments is leading them to increasingly embrace hedge funds, an area that had been long out of favour due to unimpressive returns, according to an annual survey by Blackrock, released on January 18.
The trend is being reflected in the investment allocation patterns of Asian investors as well, experts told AsianInvestor.
Hedge funds enjoyed the biggest change in allocation expectations among institutional investors, revealed the BlackRock survey. It was comprised of the responses of 224 global institutional investors globally, representing $7.4 trillion in assets.
Twenty percent of institutions said they expected to increase allocations to hedge funds, versus 15% that intended to decrease their allocations, meaning a net 5% of institutions expect to raise such investments. Sixty-five percent of investors said they would leave allocations unchanged.
That compares to the 2016 survey, in which 28% of institutions expected to drop hedge fund allocations (28%) versus 17% seeking to raise them. Fifty five percent expected to leave allocations unchanged.
Janet Li, Asia wealth business leader at Mercer, told AsianInvestor noted that the survey results underline Asian investors’ ongoing desire to use alternatives to gain some yield in 2018.
“In a tough market where the potential for generating alpha is limited, asset owners have to think hard about what they can invest in to generate good returns,” Li told AsianInvestor. “Hedge funds are an investment strategy that can generate absolute returns, and unlike traditional long-only products hedge funds are less affected by market movements.”
Some regional institutions have already offered a vote of confidence in hedge funds: Japan Post Bank, for instance, plans to continue bumping up its investments in hedge funds as part of a broader push into alternatives to boost returns, Naohide Une managing director and head of the group’s strategic investment department, said at AsianInvestor’s Southeast Asia Institutional Investment Forum in Singapore on December 6-7.
2017 was a good year for the troubled global hedge fund industry, whose assets under management grew by $219 billion—investor inflows contributed to $113.5 billion while $105.5 billion were attributed to performance-based gains, according to Eureka Hedge’s January 2018 report.
The figures are an improvement from 2016, when assets under management dropped by $20 billion. Investor redemptions during that year were $55 billion, while performance-based gains were $35 billion, according to the report.
Returns, meanwhile, have not been that impressive. Data from Hedge Fund Research stated that hedge funds across categories gained 8.5% in 2017, up from 5.5% in 2016. Those figures compare poorly to traditional benchmarks such as the S&P 500, which gained 19% in 2017, and 9.5% in 2016.
Private debt and equity
While Mercer’s Li said there was increasing interest in hedge funds, she also noted that investors continue to be most eager to invest into private equity and private credit.
Private credit is very much on global investor radars, according to the BlackRock survey, with 58% of respondents looking to increase allocations. Investors across Asia Pacific have been increasingly interested in the asset class.
Paul Colwell, director of investments for Asia at Willis Towers Watson, said his team has worked with some institutional investors in the region to build portfolios that have exposure to various forms of alternative credit.
“This includes leveraged loans, high yield debt, securitised and covered bonds, bank capital, distressed debt and private debt,” Colwell told AsianInvestor.
Currently, most of the investors he works with hold assets at both ends of the capital structure (investment grade, corporate bonds and equity), he said.
“An allocation to a diversified portfolio of alternative credit exposures [from a wide range of issuers] helps investors to take advantage more of the middle layer of the capital structure,” he added.
Private equity also continues to attract institutional investors, although there has been a small drop year-on-year, according to the Blackrock survey.
A net 33% of institutions plan to increase private equity allocations in 2018, while 35% of institutions aimed to lift private equity allocations in 2017.
Korea’s Public Officials Benefits Association is a good example of that interest: at the Asia Private Equity Forum held in Hong Kong on January 17, chief investment officer Jang Dong Hun said nearly half the institution’s investments now sit in alternatives, as it pursues an absolute return strategy.
About 14% of those investments, is in private equity. About 30% of those private equity investments have been made in overseas markets, he added.
Lower equities interest
Overall, real assets are expected to be one of the biggest beneficiaries of institutional allocations. A a net 58% of investors seeking to raise investments in 2018, the BlackRock survey showed, the same level as last year’s survey.
After a spectacular year for global equities, more investors are also looking to move away from equities, according to BlackRock. Thirty five percent of institutions are likely to reduce allocations to equities, which is 14 percentage points higher than those seeking to raise allocations (22%). Another 43% expected to keep allocations unchanged.
“The data suggests some of the moves out of equities are being led by corporate pension plans de-risking,” a BlackRock spokesperson told AsianInvestor.
Institutional investors at AsianInvestor’s Southeast Asia Institutional Investment Forum held in Singapore on December 6th and 7th also flagged concerns about the high risks associated with equities, which are increasingly viewed as being expensive.