Investors boosting allocation to hedge funds

Apr 01, 2019
Alpha generation and diversification behind move

Despite a turbulent 2018, noticeable for poor performance, institutional investors are boosting their allocation to hedge funds, driven by a search for alpha generation and diversification, a JPMorgan Chase institutional investor survey finds.

An examination of these investor priorities geographically shows alpha generation to be the primary reason for investors in EMEA (58 percent) and Asia-Pacific (57 percent), while fewer consider it as important in the Americas (51 percent).

Thirty-two percent of respondents plan to boost allocations, up from 15 percent in 2018, with only 13 percent expecting a decrease and 55 percent saying they plan to maintain current allocations.

Capital invested in hedge funds will likely be reallocated across different strategies and managers, particularly away from long-biased equity strategies and into volatility, macro/relative value and credit strategies, notes the report. Almost half of the investors surveyed by JPMorgan Chase plan to increase exposure to Asia.

‘Hedge funds are positioned well and investors are becoming more aware of the value propositions they can offer in certain markets,’ says Michael Monforth, global head of capital advisory at JPMorgan Chase. ‘It’s a diversification play.’

The hedge fund industry took a big loss last year, falling 4.8 percent on a fund-weighted basis, according to Chicago-based Hedge Fund Research. Hedge funds saw a massive $33.5 bn in outflows during this period.

Crowding continues to be the primary concern for investors when allocating to hedge funds: 80 percent of respondents name it in their top three. Eighty-two percent of respondents believe there are too many hedge funds chasing limited opportunities to generate alpha. Style drift, lack of communication/transparency and macroeconomic factors are the other most-referenced concerns.

Investors negotiating fees has become an increasingly prevalent practice when investing in hedge funds: for the first time in the survey’s 16-year history, more than half of all investors are currently negotiating or looking to negotiate fees paid to hedge fund managers.

JPMorgan Chase polled 227 investors with around $706 bn in hedge fund assets for its annual Institutional Investor Survey.

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