Home ListingMay 12, 2016

Hedge Funds Top Choice for Factor Exposures

Investors are increasingly adopting factor-based strategies, with hedge funds as their preferred vehicle.

Reported by Featured Author

Institutional investors are increasingly turning to factor investing—and hedge funds are by far the most preferred route, according to Citigroup.

In a survey of investors representing close to $1 trillion in total assets, the bank found that 81% were either currently investing in or looking to invest in smart beta and risk premia strategies—with 86% planning to increase factor investments over the next three years.

Hedge funds were the most preferred vehicle for factor investing, chosen by 69% of respondents.

citi smart beta Source: Citi Prime Finance Survey“As interest in risk premia solutions continues to rise, we expect hedge funds to play an increasingly important role in providing diversification through risk-aligned strategies,” said Daniel Caplan, Citi’s head of investor services sales for Europe, the Middle East, and Asia.

Half of respondents said they had more than $2 billion committed to hedge funds, while 63% allocated at least $1 billion. Just over half said they planned to increase their exposure to hedge funds over the next three years, targeting macro and equity long-short strategies in addition to risk premia.

Citi projected that assets under management in smart beta and risk premia funds will reach $1.2 trillion by the end of 2019—more than quadrupling since 2014, when assets totaled $265 billion. Smart beta exchange-traded funds (ETFs) are also on the rise, with 45 launched in 2015 alone—though only 8% of investors said they used ETFs to access factor exposure.

Investors overwhelmingly preferred multi-factor investing to single-factor strategies, and said they were attracted to the strategy because of perceived opportunities for volatility mitigation and return optimization.

“The adoption of style- and factor-based strategies can help investment managers identify determinant market shifts,” the report said, “and implement differentiated strategies away from consensus trades.”