Institutional investors are predicting strong growth and attractive risk-adjusted returns in the hedge fund sector, and are planning to back expansion with increased allocations, new global research by Beacon Platform Inc shows.
The study found almost all (93 per cent) institutional investors questioned expect an increase in fundraising by hedge funds of 10 per cent or more over the next three years with 14 per cent predicting growth of more than 20 per cent.
Beacon’s research with 100 pension funds, family offices, and insurance asset managers in the US, UK, Germany, Switzerland, France, Italy, Hong Kong, and Singapore found 91 per cent expect the hedge fund industry to add more than USD190 billion in assets this year with 26 per cent expecting it to add between USD250 billion and USD500 billion.
Data from Hedge Fund Research earlier this year estimated total assets under management at hedge funds hit a record USD4.6 trillion at the end of the first quarter this year. The research for Beacon, the open and cross-asset platform for portfolio analytics and risk management, shows all institutional investors questioned believe investing in hedge funds will be attractive in terms of risk-adjusted returns over the next five years, with 17 per cent describing it as very attractive.
However, the surveyed group have some caveats and concerns about their hedge fund investments. A large majority (88 per cent) of these investors agree that the quality of information and transparency in hedge funds needs to improve, with 22 per cent saying it needs to improve dramatically. This may be a contributing factor to changes in fund allocations. A slightly similar amount (85 per cent) has decided not to invest in a particular fund because of concerns over its risk management, and almost all (93 per cent) think that this will be a growing trend.
That is supported by their views on what will happen with allocations to hedge fund strategies by different types of institutional investors, as the table below shows.
The research by Beacon found that the group was most optimistic about pension funds, expecting 81 per cent to increase their hedge fund allocation by 10 per cent or more, compared to 54 per cent of Sovereign Wealth and 49 per cent of Wealth Managers/Retail Investors.
Beacon’s research shows that the majority of institutional investors and wealth managers are expected to increase their allocation to hedge fund strategies as they look to diversify their portfolios and achieve better risk-adjusted returns. However, to capitalise on this growth, hedge funds clearly need to focus on the quality of their risk management and have high levels of transparency that investors are increasingly demanding before investing with them.
