The Credit Suisse 2019 Hedge Fund Investor Survey – from which we feature extracts in this issue – sheds light on the strategy, manager, geographic and vehicle preferences of 311 institutional investors with $1.12 trillion in hedge fund investments. Some 92% of respondents will maintain or increase their exposure to hedge funds in 2019. Since redemption proceeds are nearly always being redeployed into other hedge funds, it is spurious to extrapolate trends from quarterly redemption data, which much of the time is really little more than random noise.
Emerging markets equity, healthcare equity, and event driven equity were the top three strategies for allocators. Within emerging markets, Greater China is attracting much more interest than Latin America, Africa/MENA or Eastern Europe.
Strategy preferences are reasonably correlated with return expectations, which are in low double digits for some of the more sought-after strategies. However, given double digit performance dispersion within strategies (even between the 25th and 75th percentiles), managers’ expected performance, rather than strategy expected performance, is more decisive. The provenance of the performance also matters: allocators are increasingly seeking out a track record in shorting.
Preferences vary between regions. Equity-oriented strategies are most popular in the Americas, with discretionary macro the number one strategy in EMEA and multi-strategy top in APAC.
A growing number of allocators group hedge funds under the relevant asset class, such as fixed income or equities; though most are still classified under the alternatives umbrella. Nobody seems to have a separate bucket for hedge funds; it was always a misnomer to describe hedge funds as an asset class.
Customisation is a growing trend, implemented via separately managed accounts, funds of one and co-investments. The growth of co-investments is one of the most striking trends of recent years: just 7% of investors allocated to co-investments in 2010. Now 41% – and 68% of those with assets above $5 billion – do so. Co-investments are offered in both equity and credit, and encompass a wide range of strategies going well beyond activist and distressed. Key motivations for co-investments are alignment of interests and higher returns with pension funds prioritising lower fees – over half of co-investments have no management fee, but 78% have a performance fee. Most co-investments are below $25 million in size, which makes them a realistic proposition for smaller and medium sized allocators. However, finding the time and resources to carry out due diligence on co-investments is an obstacle in some cases.
The outlook for start-ups may be improving: 73% of respondents allocated to a new launch in 2018, up from 43% in 2016. Funds of hedge funds were most likely to back a new launch – 89% did so – while pension funds were least likely to at 44%. That said, some pension funds have written substantial seed tickets. We will showcase some new launches in our Tomorrow’s Titans report of “rising star” hedge funds this summer.