Institutional Investors Have High Hopes for Hedge Funds in 2019

Optimism remains bright for the hedge fund industry as two thirds of institutional investors were happy with their hedge fund returns over the past year, data firm Preqin reports.

Out of 530 investors surveyed in June, 66% were pleased with their performances, saying that their hedge funds had met expectations in the past 12 months. A small block of investors (16%) said their funds exceeded expectations.

Those surveyed also had a positive outlook for the near future, with 32% expecting their funds to do even better over the following year, and 51% that said their hedges will perform just as well as they have been doing.

Amy Bensted, head of Preqin’s hedge funds division, said that despite the industry’s mediocre returns in 2018, investors are seeing that “over the longer term, hedge funds have been able to generate positive returns.” She noted investors are worried about a peak approaching in the equity markets as well as difficulty generating consistent momentum due to the “instability of the political and macroeconomic climate.”

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More than two-thirds of institutional investors are planning to make their next hedge fund investments in the second half of this year, with 16% considering hedge fund allocations next year.

Of the surveyed, 28% are looking to increase exposure to systematic commodity trading advisors, or CTAs, in the next 12 months. About 26% will add more macro strategies to their portfolios.

As for the space’s 2019 growth areas, 63% of investors see the most opportunity in North America, 28% are looking in Asia, and 25% are eyeing Europe as the hedge fund industry’s next breakout spot.

“Investors perceive several benefits of hedge funds, citing diversification, low correlation to other asset classes and high-risk adjusted returns as key reasons to invest in the asset class,” said Bensted. “It is perhaps due to the current volatility in the market that that four out of five investors expect hedge fund performance to maintain or improve in the coming year.”

Tags: Hedge Funds, Preqin

Massachusetts’ Pension Reserves Investment Trust (PRIT) Fund returned 9.5% net of fees in fiscal 2018, exceeding its benchmark of 7.9%, and bringing its total asset value to $72.9 billion for the fiscal year ending July 31, according to the Massachusetts Pension Reserves Investment Management Board (PRIM).

“Fiscal year 2018 was another exceptionally strong year for PRIM,” said Michael Trotsky, CIO of the PRIM board at its August meeting, adding that “six of seven major asset classes outperformed their benchmark net of fees.”

The fund’s three-, five-, and 10-year annualized returns as of July 31 were 8.7%, 9.0%, and 6.7%, respectively, compared to its benchmark’s annualized three-, five-, and 10-year returns of 7.4%, 7.5%, and 5.9%, respectively.

“The returns of each asset class and the entire PRIT Fund were very strong both relative to the benchmarks and in absolute terms,” said Trotsky, “and importantly, expenses and risk remained tightly controlled.”

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Private equity was the top-performing asset class for the fund, returning 19.9% for the year, followed by global equities, which returned 11.7%, and real estate, which returned 8.9%. Timberland and the portfolio completion strategies returned 7.4% and 6.8%, respectively.

The fund said The American Investment Council ranked PRIM Private Equity No. 1 in private equity returns among 163 US public pension funds based on a 10-year performance.

The long-term asset allocation targets for the fund are 39% in global equity, 13% in portfolio completion strategies, 12% in core fixed income, 12% in private equity, 10% in real estate, 10% in value-added fixed income, and 4% in timberland.

Trotsky said the 9.5% return was achieved with a realized volatility of 4.3%, producing a Sharpe ratio, which measures the risk-adjusted return of the fund, of approximately 1.8. He added he believes this ratio would be among the highest in the country, “meaning our portfolio is higher returning relative to our peers even though it has comparatively lower risk, and low cost.”

The PRIT fund is a pooled investment fund that invests the assets of the Massachusetts Teachers’ and State Employees’ Retirement Systems, and the assets of county, authority, district, and municipal retirement systems that choose to invest in the fund.

Tags: Fiscal Year, Massachusetts’ Pension Reserves Investment Trust Fund, Pension, Returns