Respondents to BNP Paribas' annual 2024 Alternative Investment Survey reported that in 2023 their hedge fund portfolios delivered an average return of 6.67%, 1.5% below their target return, with equity long/short funds focused on the Americas or on technology, media and telecommunications delivering the best performance.
All hedge funds tracked by BNP Paribas returned an average of 7.66% in 2023, differing from the survey results released on Feb. 12. In 2022, these hedge funds returned an average of 0.42%, said a BNP spokesperson. However, survey respondents said their hedge fund portfolios returned an average of 1.1% in 2022.
Conversely, discretionary macro and commodity trading adviser strategies were the worst performers in portfolios, after having ranked at the top in 2022, the survey noted.
Over the full 24-month period encompassing both 2022 and 2023, the average hedge fund outperformed global equity markets by 5.72%, BNP stated.
Historical studies show that as hedge funds tend to perform well during periods of high, stable interest rates, survey respondents have upgraded their return targets since 2022 to 9.06% from 7.45%, marking the highest such level in more than 10 years as they expect moving into a high stable rate environment.
The hedge fund industry suffered up to $100 billion of net outflows in 2023, the survey revealed, given hedge fund underperformance versus their expected returns in prior years, with investors taking profits from their hedge funds to rebalance their portfolios following 2022 outperformance versus other investments and 5% risk-free rates.
However, looking at the year ahead, almost one-half of survey respondents are planning to contribute to hedge funds, expecting to add $17 billion on a net basis in 2024 — up 70% from the $10 billion net they added in 2023.
The survey also found that credit strategies remained the most popular among respondents — with 33% looking to add on a net basis. Credit was also the most sought after strategy in 2023.
The survey also revealed that the retreat from China is expected to slow down in 2024. In 2023, 42% of investors on a net basis withdrew capital from China-focused hedge fund managers as the country's economy weakened in the wake of the COVID-19 pandemic and the recent crash in the real estate market. However, in 2024, only 6% of investors on a net basis are looking to redeem.
Separately managed accounts appear to be rising in popularity — a quarter of survey respondents invest in some of their hedge funds through SMAs, accounting for more than one-third of their hedge fund assets. This figure is expected to climb in 2024 as 13% of allocators are looking to add to hedge funds through an SMA structure, with half of these being first-time SMA allocators.
The survey also confirmed that hurdle rates remain a high priority among investors — some 28% of respondents said hurdle rates were a high priority when making new allocations. However, BNP noted that investors remain focused on better aligned fee structures with almost 75% of respondents citing they would overlook their preferred fee structure in favor of managers with outstanding performance, while only 9% said they would under no circumstances allocate without a favorable fee structure in place.
"Allocators are starting to position for an era where alpha and diversification are finally expected to deliver strong returns, as they anticipate a departure from the past decade's U.S. equities dominance," stated Marlin Naidoo, global head of capital introduction at BNP Paribas, in the survey. "Whether through asset allocation changes or a portable alpha implementation, this pivot spells opportunity for hedge funds."
BNP's survey comprised 238 allocators and was conducted in December 2023 and January 2024. These allocators invest or advise on $1.2 trillion in hedge fund assets — or about one-third of industry assets under management.
Of those respondents, 60 were institutional end investors; 89 were intermediaries; another 89 were private investors.