Asset AllocationFebruary 25, 2015

Investors Renew Faith in Hedge Funds

But fees and regulation worry asset owners and managers alike, according to Preqin.

Reported by Featured Author

Investors are optimistic about hedge funds’ performance this year after experiencing an annus horribilis in 2014, but concerns about fees and regulation remain, according to Preqin.

The data provider’s most recent survey revealed institutional capital is set to flow into the asset class this year, with 26% of investors saying they would increase their allocations. Some 40% of consultants also said they would recommend their clients raise exposures.

These forecasts coincided with an overall positive outlook for hedge funds in 2015. Despite poor performance in 2014, 65% of surveyed investors said they believed hedge funds satisfied their expectations. Nearly the same amount of managers said they expected the industry to do better this year.

Specifically, managers were most confident in macro and equity strategies while about a third believed credit strategies were likely to perform the worst. Consultants were most optimistic about event-driven strategies, with half saying they would recommend them to clients more frequently than they did in 2014.

Despite this confidence, Preqin found fees continued to be a key issue for investors.

“Fund managers must be prepared for investors to negotiate terms and conditions and to reassess the alignment of interests between fund managers and investors,” the report said.

Some 68% said they were dissatisfied with management fee terms, while 38% said they want to see improvements in performance fees. More than a quarter of respondents said they wanted more transparency in 2015.

Hedge fund managers, however, had different concerns, the survey said.

Nearly 60% of managers said regulation would introduce negative consequences to the industry, an eight percentage point increase from last year. The survey showed they were most concerned about “a number of compliance measures and regulatory burdens for fund managers active in the alternative space.”

“The combined effect of increasing costs and complexity on the running of their businesses, as well as continued uncertainty surrounding certain regulations across the globe has led to greater pessimism from fund managers regarding the impact of regulation,” Preqin said.

Consultants were similarly worried, with 68% citing regulation as a challenge for hedge funds in 2015.