Hedge fund managers and asset owners are expecting stronger hedge fund returns during the remainder of 2023, according to a survey of 82 entities conducted by BNP Paribas Capital Introduction.
That's in part because of rising interest rates, which are forcing hedge funds to outperform the risk-free rate.
Forty-eight of those that completed the BNP Paribas survey were investors and 34 were hedge fund managers.
Collectively, assets under management by the hedge fund managers in the survey pool managed or advised on a total of $170.2 billion. Asset owners' hedge fund investments totaled $132.7 billion.
Current equity market conditions are more favorable this year than they were the previous year, said Marlin Naidoo, global head of capital introduction and consulting in an interview.
"Low beta did very well in 2022 and has done very well this year," Naidoo said, noting that strong hedge fund strategies this year include equity long short; quantitative equity; and statistical arbitrage.
BNP's survey data showed that in the current environment, asset allocators such as pension funds and other institutional investors expect higher returns for their hedge fund investments, and are targeting an annual return of 9.75%, up from 6.85% previously; 62% of hedge fund companies think they should outperform the risk-free rate by 6% or more, the report said.
Because of market conditions, close to half of asset allocators said they are altering their current asset allocation as a result of the change in rates. Credit, CTA and discretionary macro are attracting the most new funding.
He added that the last quarter of 2023 is going to be incredibly important for hedge funds and said that he's not seeing a lot of new allocations from asset owners.
In addition, 90% of investors said the managers' "hurdle rate" should be in line with the risk-free rate or relevant benchmark, while only 42% of fund managers agreed.