Investors are ‘unenthusiastic’ about investing in ‘polarizing’ hedge fund asset class — Preqin

Investors aren’t planning to dramatically increase their hedge fund investments anytime soon, and many are holding steady for the long term, according to a new survey from Preqin.

Thirty-five percent of investors reported they are planning to allocate less capital to hedge funds over the next 12 months. That’s an uptick from 26% who were planning to reduce their allocations a year earlier, according to Preqin’s June survey.

“We’ve been asking this question for over 10 years, and the 35% share of survey respondents that said they were looking to allocate less capital was the second highest share since 38% indicated this in the fall of 2016,” said Charles McGrath, associate vice president of research insights at Preqin, in an email to Pensions & Investments.

Almost a majority of investors, 47%, said they expect to commit the same amount of capital to hedge funds over the next 12 months and only 18% reported they expect to commit more capital down from 28% expecting to increase allocations last year. Of those investors looking to allocate, 68% are planning to defer decisions until 2025, with 40% saying they will wait until the second half of 2025 to invest new money.

Investors have been keener on other areas of alternatives, including private credit, according to the Preqin report.

Preqin wrote in its report that with hedge funds, “Investors remain unenthusiastic about committing capital to the polarizing asset class.”

McGrath said, “I think in the case of some strategies, namely equity long/short, there has been a decline in alpha, or the active return, investors are getting, even if market correlations remain low, and this is making higher fees less acceptable than they used to be.”

He added that cash flows for other strategies — including global macro, commodity trading advisers and niche strategies — have been neutral.

When asked how investors are planning to allocate to hedge funds over the longer term, 63% reported they would maintain allocations, 21% said they would decrease and only 16% said they plan to increase allocations.

Investors are looking towards hedge funds to mitigate risk and 68% of investors said diversification was among the primary reason for their allocations as well as 49% pointing to low correlation to other asset classes, Preqin found.

Hedge fund investors are keen on credit strategies and equity strategies, according to the report. While investors are the least positive towards two hedge fund strategies: cryptocurrency and emerging markets.

Overall, through the first half of the year, hedge funds posted decent performance up nearly 6% on average.

Preqin found that nearly two-thirds of hedge fund investors have long-term hedge fund return expectations of 6% to 12%.