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INVESTING/PORTFOLIO STRATEGIES

Investors lower hedge fund return expectations for 2017 — report

Institutional investors lowered the target return for their hedge fund portfolios in 2017, showed results of a global hedge fund survey released Wednesday.

On average, endowment and foundation executives surveyed for Deutsche Bank’s annual alternative investment survey, reduced their hedge fund return target in 2017 to 7.92%, compared to 7.98% (realized return, 4.87%) in 2016; 7.6% (2.69%) in 2015; 8.63% (6.19%) in 2014; and 8.75% (9.38%) in 2013, according to the results of Deutsche Bank’s 15th annual survey.

Public and private pension funds, on the other hand, dropped their hedge fund portfolio return target on average to 5.78% in 2017, down from 5.84% (realized return, 3.17%) for 2016; 6.71% (3.22%) in 2015; 6.51% (5.61%) in 2014; 7.97% (7.5%) in 2013; and 6.71% (3.22%) in 2012.

The 420 respondents surveyed by Deutsche Bank in December were generally optimistic about the hedge fund industry’s collective ability to outperform the returns of major market indexes in 2017.

The group predicted that in 2017 the HFRI Fund Weighted Composite index will return 3.91% vs. 3.63% for the S&P 500 index and 3.31% by both the MSCI World index and the MSCI Emerging Markets index.

In 2016, the institutional investor forecast was for the HFRI Fund Weighted Composite index to return 3.43%, and topping the 2.67% predicted return of the S&P 500 index, the 3.1% return of the MSCI World index and the 2.27% return of the MSCI Emerging Markets index.

The 2016 forecast was wrong: The actual 5.51% return of the HFRI index topped the prediction, but significantly trailed returns of the major market indexes with the S&P 500 index returning 9.54%, the MSCI World index, 8.15%, and the MSCI Emerging Markets index, 11.6%.

Survey data showed that family offices are the largest investors in both alternatives generally and hedge funds specifically, with median allocations of 67% and 35% of total fund assets, respectively, survey results showed.

Endowments and foundations follow with a median allocation of 48% to alternatives and 21% to hedge funds; investment consultants, 23% alternatives and 10% hedge funds; pension funds, 22% alternatives and 5% hedge funds; private bank/wealth managers, 9% alternatives and 4% hedge funds; and insurances companies, 8% alternatives and 2% hedge funds.

The median allocation for all respondents as a percentage of total fund assets is 30% to alternatives and 12% to hedge funds.

The majority of institutional investors increased or maintained their hedge fund allocations in 2016 as 26% of pension funds raised their hedge fund allocations, 54% maintained the current level and 20% decreased the size of the hedge fund portfolios.

In 2016, 22% of endowments and foundations bumped up their total hedge fund investment, 53% remained the same and 25% lowered their total investments.

For all types of respondents, 20% upped their hedge fund investments in 2016, 50% held steady and 30% decreased the size of their hedge fund portfolio.