Constructing an effective allocation to hedge funds that meets portfolio objectives is challenging for many investors. As our recently launched H2 2017 Investor Outlook reveals, 55% of investors interviewed by Preqin believe that their hedge fund portfolios failed to meet expectations over the 12 months to June 2017. However, a more nuanced picture emerges when looking beyond the headline portfolio figure to investor satisfaction with individual funds and strategies. As our June survey of 178 investors shows, there is wide dispersion when it comes to investors’ performance experience relative to expectations (Fig. 1). For instance, 48% reported that over half of their hedge fund portfolios had failed to meet expectations over the 12 months to June 2017; and, although 13% of investors have constructed portfolios in which all funds have met their expectations over that period, a similar level (12%) revealed that all of their holdings had failed to meet their benchmarks.
A similar theme emerges when we look at this on a strategy basis, with investors reporting differing levels of satisfaction when comparing hedge fund strategies (Fig. 2). Approximately three-quarters of investors in each of event driven strategies and credit strategies reported that their investments had met expectations over the 12 months to June 2017; in comparison, less than half (48%) of investors in macro strategies were satisfied with returns.
Therefore, although performance concerns prevail, a deeper look at investors’ experience on a strategy and portfolio basis reveals a more detailed image of the hedge fund industry. The term 'hedge fund' encompasses a universe of more than 15,000 funds pursuing many different strategies, investment styles, instruments and regional themes. Most investors recognize that many funds within their portfolios are meeting expectations, and that certain strategies are meeting their performance objectives as a whole. However, with the proliferation of funds over recent years, investors are finding it difficult to source the better funds, particularly as the disparity between the top and bottom performing funds within a strategy can be significant. Therefore, intelligence that can help investors cut to the funds that meet their needs may be the first step for many institutions to building the hedge fund investment portfolios that will help them meet their liabilities in 2017 and beyond. For fund managers, in an environment where both keeping capital and growing assets is difficult, it is more important than ever to know investors and to understand not only what their plans are for fresh investment, but also how hedge funds can help these investors face their challenges in the future.