Hedge funds saw a flurry of interest from European pension funds last year as investors braced for an expected low return environment, according to a survey from Mercer.
The consulting giant found that the proportion of its 1,241 respondents with allocations to hedge funds grew by 4.6% year-on-year, the biggest growth of any alternative asset class.
Despite hedge funds on average struggling to post competitive returns in recent years, as well as concerns over high management fees, Mercer said investors had “not lost faith”.
The increase was “consistent with an environment where returns from traditional market betas will be hard to find”, the consultant said.
More than a third (37%) of respondents had an allocation to hedge funds, the survey found. The average allocation was 6%.
By far the most popular strategies were funds-of-funds, used by 23% of hedge fund investors, and multi-strategy vehicles, used by 12%.
Deb Wardle, alternatives portfolio manager at Mercer, said: “Over recent years, hedge funds have generated positive but muted returns, particularly when compared to traditional equity and fixed income asset classes.
“The current outlook for traditional asset classes, however, appears more challenging, and hedge funds, with their absolute return focus, offer an attractive proposition on a relative-value basis.
“In addition, we expect higher volatility and lower correlations across markets going forward, which should provide attractive opportunities for active management in general, and hedge funds in particular.”
Research from data specialist Preqin published earlier this year showed hedge fund managers were becoming more willing to cut fees as competition for institutional assets increased.
Mercer’s survey also showed a slight decrease in the proportion of investors with an allocation to private equity, which fell by 1.5%. This was in contrast to a survey of alternatives investors published by Coller Capital in December, which reported an increase in allocations to private equity at the expense of hedge fund holdings.