Despite several years of lackluster aggregate returns, hedge fund assets under management are expected to climb 3.5% in 2016.
That’s according to the latest Credit Suisse Annual Hedge Fund Investor Survey, which painted a rosy outlook for the hedge-fund industry. The broker forecast that overall AUM will top $3 trillion this year — with an upper-quartile forecast for $3.2 trillion by year-end.
The survey gathers responses from 369 institutional investors globally, representing $1.1 trillion of hedge fund investments. It includes input from pension funds, endowments, foundations, consultants, family offices and funds of hedge funds.
About 87% of survey respondents said they would maintain or increase their hedge fund allocations in the coming year. Within that universe, insurance companies identified themselves as being most underweight hedge funds (compared with institutional peers), which could allow for further growth.
“Institutional investors remain committed to their hedge fund allocations and are optimistic for further growth in the industry during the upcoming year,” Robert Leonard, global head of capital services at Credit Suisse, said in a statement. “This year’s survey provides some interesting insights into how institutional investors are considering positioning their hedge fund portfolios for the possibility of continued volatility in global markets.”
Globally, Equity Market Neutral-Fundamental strategies were forecast by investors to be the most preferred investment methodology for 2016 with 34% net demand. Leonard said that this represents a move up from the #5 ranked strategy in the firm’s 2015 survey. Equity Market Neutral-Quantitative was the second most preferred strategy with 30% net demand, which also climbed in the rankings from last year when it was ranked 7th.
In July last year, Credit Suisse reported in its survey the top three strategies by net demand (percentage increasing allocation – percentage decreasing allocation) on a regional basis were:
– Americas: Event Driven (51 perecent), Long/Short Equity – Fundamental (46 percent) and Emerging Markets Equity (28 percent)
– APAC: Event Driven (64 percent), Long/Short Equity – Fundamental (56 percent) and Equity Markey Neutral – Fundamental (44 percent)
– EMEA: Event Driven (63 percent), Long/Short Equity – Fundamental (29 percent) and Global Macro (24 percent)
“Increased interest in strategies such as equity market neutral, global macro and equity long/short trading-oriented appears to indicate that investors are anticipating another challenging environment for 2016,” he added. “Key factors noted in making new allocations were net returns, pedigree of investment team and lack of correlation with other investments.”
As to why investors would select hedge funds over other investments, Credit Suisse found that the top three factors indicated when selecting hedge funds for an institutional portfolio are returns after fees, pedigree of risk takers & core team stability and non-correlation with other investments. Other factors include degree of transparency and ability to lower volatility in the overall portfolio.
Also, interest for developed Europe (36% net demand) had the largest increase over last year and remained in the top spot. Asia Pacific (28% net demand) and Global strategies (26% net demand) followed behind with Japan focused strategies (17% net demand) were next in line.