Hedge fund managers that have successfully navigated their way through the first half of this year and are producing good returns are in demand by institutional investors that are adding more hedge fund exposure to their portfolios and/or are upgrading lackluster managers with better choices.
"There's a sense of optimism from hedge fund managers, backed up by investors," said Thomas P. Kehoe, managing director and global head of research and communications for the London-based Alternative Investment Management Association.
"More investors are interested in hedge funds, and are seeing a real tool they can latch on to in this difficult environment for preserving capital, managing volatility, mitigating risk and producing returns," Mr. Kehoe said.
In fact, high volatility in the first quarter this year was the catalyst for investors to consider more investment in hedge funds, said Kenneth J. Heinz, president of index provider Hedge Fund Research Inc., Chicago.
"A year ago, institutional investors were very complacent. They aren't anymore because of ultra-high equity valuations. They're building out their hedge fund portfolios by putting the unallocated portion of their hedge fund target to work," Mr. Heinz said.
From conversations with asset owners, Mr. Heinz said, "I don't think there has been this much institutional interest in hedge funds over the past 10 years."
Analysis of asset owners' hedge fund and hedge funds-of-funds hiring reported by Pensions & Investments in the six months ended June 30 showed a sharp rise in hedge fund hires — 50 totaling $4.5 billion.
The pace was more than double the 21 hires totaling $2.1 billion made in the second half of 2019. In the current quarter as of Aug. 31, 10 hedge fund hires totaling $660 million were made.
Twenty asset owners made partial and full redemptions totaling $2.6 billion in the first half of 2020 and nine terminations totaling $2.8 billion were announced between July 1 and Aug. 31, P&I data showed.
In contrast, a total of $675 million was redeemed from hedge funds/hedge funds of funds by six asset owners in the second half of 2019.
Consultants, hedge fund managers and other sources said the comparatively high rate of redemptions this year likely stemmed from manager replacements and strategy changes.