Many institutional investors were satisfied with the defensive role their hedge fund portfolios played during the ferocious market conditions sparked by the COVID-19 pandemic, even if the performance of some of their hedge fund managers was down in the first quarter.
In fact, some asset owners are actively seeking to invest more in hedge funds that can take advantage of extreme market mispricing, consultants said.
Aggregate returns of Hedge Fund Research Inc.'s broad hedge fund indexes were negative in the first quarter — the HFRI Fund Weighted Composite slumped 9.4% and the HFRI Asset Weighted Composite was down 10% — but both bested the 20% decline of the S&P 500 index as did all but one of HFR's major strategy indexes.
The returns of hedge funds compared with long-only market indexes demonstrate the diversification and alpha production benefits they provide to institutional portfolios, sources said.
"Our clients are generally pleased with what's in their hedge fund portfolios in terms of both top-down strategy and individual managers," said James A. Neumann, New York-based CIO of hedge fund consultant Sussex Partners U.K. Ltd., in an interview.
"The environment in the first quarter was a good test of the power of diversification hedge funds offer institutional portfolios," he said.
For example, the $1.2 billion hedge fund portfolio of the Employees' Retirement System of Texas, Austin, proved its worth as an important diversifier for the $26.5 billion defined benefit plan in the quarter ended March 31, said CIO Charles Thomas "Tom" Tull, in an interview.