In December 2012, Preqin conducted in-depth interviews with 85 leading institutional investors in hedge funds in order to get an idea of their outlook for the asset class in 2013. The study covered a range of topics including investors’ views on hedge fund performance in 2012, how this has affected their attitude to the asset class and their outlook on regulations.
Fifty-seven percent of investors interviewed reported that hedge fund returns have met expectations in 2012, which is a higher proportion than the 49% and 53% who indicated this in 2011 and 2010 respectively. However, the proportion of investors stating that returns have exceeded expectations has fallen from 11% in 2011 to 3% in 2012, meaning that the proportion of investors reporting that hedge funds had fallen short of expectations increased slightly from 40% in 2011 to 41% in 2012. Hedge fund performance has improved in 2012 in comparison to 2011, but overall the asset class has failed to meet investor expectations, and with 41% of institutions reporting that hedge funds have fallen below expectations, disappointment with performance is at its highest level since Preqin began collecting this data in 2008.
Unsurprisingly, this has led to investors stating performance as a primary concern for 2013, with 47% of those surveyed indicating this as a key issue for the year ahead. Other key issues cited by investors include regulation, which was mentioned by 24% of respondents, and fees and transparency, stated by 23% of investors as a key issue. Investors were also asked if they feel regulations are positive for the hedge fund industry, with 49% expecting this to have a positive change, 33% expecting a negative change and 18% expecting no change. Investors feel that regulations can be positive due to the increased transparency and oversight this will lead to, although some investors believe that regulations may drive up costs and make it more difficult for smaller, more nimble hedge fund managers.
The Preqin survey indicates that performance is going to be a major issue for the industry in 2013. Investors are demanding stronger returns and will be keeping a close eye on industry performance to see if hedge funds are living up to expectations. The coming year will also see new regulations in the hedge fund industry and many institutional investors believe that such regulations will be good for the industry as a whole and as a result this may present opportunities for funds looking to tap into the institutional market.