Preqin: Investor Satisfaction With Hedge Funds Rising Amid Allocation Uncertainty

Sep 21 2017 | 7:44pm ET

Nearly half of hedge fund investors report being satisfied with the returns they have received, according to new data from Preqin, although nearly the same proportion still expect to reduce their allocations to the asset class over the next twelve months. 

The results stem from Preqin’s June 2017 survey of 108 institutional investors in hedge funds. The poll also revealed that the proportion of institutions that feel their hedge fund portfolios have met or exceeded performance expectations has doubled in the past 12 months, rising from 21% in June 2016 to 45% in June 2017. In addition, more than half now have a positive or neutral view of the industry. 

However, concerns about the industry have not entirely subsided. While strong returns in 2017 have boosted investors’ short-term opinions, nearly three-quarters still believe hedge funds have failed to meet their expectations when the time horizon is extended to three years. Most illustrative of continued skepticism: almost half intend to reduce their exposure to hedge funds in the coming year. 

Key hedge fund investor facts from Preqin’s survey: 

  • Forty-five percent of investors say hedge funds have met or exceeded their expectations over the past 12 
months. This is up from 34% that said the same in December 2016, and 21% that said so in June 2016. 

  • A third (33%) believe hedge funds will perform better over the next 12 months than in the previous 12, while just 6% believe they will perform worse. This is down from 19% that took a negative view in December. 

  • Almost a fifth (18%) of investors now have a favorable view of the industry, and a further 36% are neutral. 

  • However, over three years 70% of investors say hedge funds have failed to meet their returns expectations. 

  • Despite recent robust returns, 37% report that their confidence in hedge funds to meet performance 
expectations has reduced in the past 12 months. 

  • Sixty-nine percent of investors cite performance as a key issue facing the industry over the coming year. 

  • A rising proportion of investors are looking to decrease their allocations to hedge funds. As of June 2017, 49% of investors plan to reduce their allocation over the next 12 months, up from 38% six months ago. 

  • In the longer term, 44% of investors plan to commit less to hedge funds, while 22% intend to raise their allocation. 

“Preqin’s surveys of hedge fund investors in June 2016 found their concerns surrounding the performance of the industry had reached unprecedented levels, as four out of five reported that hedge funds had failed to meet their expectations over the preceding 12 months,” recalls Amy Bensted, head of hedge fund products for Preqin. 
“A year later, this proportion has fallen considerably. Although the majority are still dissatisfied with the performance of their portfolios, a significant proportion have softened their stance in light of the consistent gains the industry has made in the past 12 months. 

“However, despite a double-digit 12-month return, and an improvement in investors’ outlook on industry performance over the next year, the long-term performance of hedge funds is still being questioned,” she added. “Seven out of 10 say that the asset class has failed to perform adequately over the past three years.

"This disappointment with returns over an extended period is having a significant impact on the industry," Benstead continued. "The proportion of hedge fund investors looking to reduce their exposure to the asset class is still growing, and now almost half of institutions are looking to reduce their allocations. Performance is cited as a key driver of this, and attendant concern over the fees they are being charged mean that hedge funds are still a tough sell for many investors.” 

Founded in 2003, Preqin is a leading source of information for the alternative assets industry, providing data and analysis via online databases, publications and bespoke data requests. The company's Hedge Fund Online service is a leading source of intelligence on the hedge fund industry, with performance information for over 16,000 hedge funds across strategies and geographies. More than 47,000 professionals in 90 nations use the company’s products. 

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