Uncertainty lies ahead for the hedge fund asset class given the monetary policy changes and geopolitical tensions experienced in 2022 so far. These have a direct impact on allocations, with investors becoming more cautious and ultimately impacting managers’ ability to fundraise. Below, we look at the top three challenges hedge funds face in today’s fundraising market and provide key solutions to overcome them.
Uncertainty lies ahead for the hedge fund asset class given the monetary policy changes and geopolitical tensions experienced in 2022 so far. These have a direct impact on allocations, with investors becoming more cautious and ultimately impacting managers’ ability to fundraise. Below, we look at the top three challenges hedge funds face in today’s fundraising market and provide key solutions to overcome them.
Allocators are planning to commit less capital to hedge funds
According to Preqin Pro, 79% of investors are intending to invest less than $50mn (the smallest allocation size) of fresh capital in hedge funds over the next 12 months, compared with 74% of investors in Q1 2022. Of the larger sizes, 9% of allocators are planning to invest between $50-99mn, 8% between $100-299mn, and 4% are aiming to put over $300mn to work over the next 12 months. To put this into perspective, in Q1 2022, 11% of investors were planning to invest between $50-99mn, 11% between $100-299mn, and 3% more than $300mn. These figures suggest that investors are becoming more cautious with their hedge fund allocations.
Low performance = low-to-no inflows
For fund managers, building out a strong performance track record remains imperative to securing further capital from investors. Almost half (46%) of those funds producing a three-year annualized return of over 5.00% as of the end of 2021 recorded an inflow. This compares with the 32% that made losses of between -0.01% and -4.99% over the same period.
This isn't a new phenomenon. Preqin’s 2021 data saw sub-5% or negative returns greatly influence future allocations. The majority of managers with 5% or greater returns in 2020 experienced inflows in 2021, and those with less than 5% returns experienced redemptions. Managers that declined 5% or more in 2020 had the highest proportion of outflows. This indicates that investors are focused on working with managers with strong returns.
The solutions
Focus on investors that are most active in hedge funds
Being able to narrow down your target list to relevant investors is key when fundraising. Focusing your time and resources on reaching out to investors that are actively allocating to hedge funds like yours is a great way to start. Building a target list based on the type of investors that are the most active in the asset class can also set you up on the right path to a successful fundraising.
Preqin tracks over 7,000 investors active in hedge funds globally on Preqin Pro. See how our detailed profiles from large public institutions to individual family offices, and everything in between, could help you achieve your fundraising targets by requesting a demo today.
Identify investors with relevant hedge fund mandates
To further narrow down your target list when fundraising, you can also prioritize investors with mandates to invest in hedge funds like yours.
As of July 2022, Preqin tracks over 300 investor mandates and RFPs for the hedge fund asset class on Preqin Pro, with detailed plans on how they will allocate to the asset class over the next 12 months. See how this data could help you boost your fundraising activity by requesting a demo today.
Analyze investors’ current vs. target allocations for hedge funds
Finally, focusing your efforts on approaching investors that are currently below their target allocations for the asset class can increase your chances of success when fundraising. Separating investors that are over-allocated to the asset class from the ones that are under-allocating against their targets will help you pinpoint the right ones to approach.
Your key to the alternatives market
Preqin Pro gives you access to the industry’s most comprehensive private capital and hedge fund datasets and tools. Find investors searching for investment opportunities like yours. Be the first to know about new investor searches and mandates. Build your pitch with detailed information on investors' past activity and future plans, and drive a successful outreach with details on key personnel and their preferred method of contact.
Preqin also publishes institutional research via Preqin Insights+, providing analysis of investor sentiment through regular investor surveys and exploring the fundraising environment across various markets.