Institutional Investors Aim to Bump Up Hedge Fund Allocation

(November 14, 2011) — New data from research firm Preqin has found that about 53% of institutional investors plan to maintain their hedge fund allocations at current levels next year, while a total of 38% revealed aims to increase their allocation to the asset class. 

The firm noted that although institutional confidence has waned as a result of poor returns toward the end of this year, the outlook for next year remains positive. “Hedge fund managers can expect a large influx of capital from institutional sources over the next 12 months, and assets could potentially reach the pre-crisis watermark of $2.6 trillion…While we expect demand for further liquidity and transparency to continue, with increasing numbers of investors opting for separately managed accounts, traditional fund structures are likely to remain at the forefront of investment portfolios,” Preqin stated in a release.  

Additional findings from the report:

1) Just 9% of investors plan to reduce the amount of capital they invest in hedge funds during 2012.

2) One-fifth stated that they had more confidence in hedge funds now than they did in 2010, while 66% felt the same level of confidence.

3) Firm track record is the most important criterion for an investor when choosing a fund manager. 

Another report released earlier this month by Hedge Fund Research showed that within the hedge fund universe, equity hedge leads the industry while macro funds decline. “Hedge funds posted gains for October concentrated in Equity Hedge and Event Driven strategies, as managers adjusted exposures intra-month in response to rapidly improving condition across equity and credit markets,” said Kenneth J. Heinz, President of HFR, in a statement. “The primary focus for managers, as well as the primary catalyst for financial markets, continues to be the European sovereign debt crisis, with the outlook having improved despite the continued likelihood of volatility and unpredictable political developments. In the current environment, fund managers are looking to maintain tactical flexibility to opportunistically adjust exposure to dynamic market conditions, while maintaining core exposures to constructive portfolio themes across equity, credit, commodity and currency markets.” 

According to HFR, while equity hedge strategies had the largest positive contribution to index performance in the month, event-driven funds also posted gains on improved equity markets. On the other hand, macro funds posted declines on trend reversals, despite positive contributions from commodity exposures and discretionary managers.