Institutions want hedge fund returns to be uncorrelated, not high – survey
Institutional investors put money into hedge funds to get returns that are uncorrelated to equity markets and to dampen portfolio volatility, rather than in the hope that the funds will produce big returns per se, according to research from alternative assets data provider Preqin.
The firm’s 2014 report into investing in hedge funds, which polled more than 100 institutional investors internationally, found that 59% of hedge fund investors were looking for uncorrelated returns from the funds, compared with just 7% who said they were aiming for high returns.
Some 56% responded by saying they were seeking risk-adjusted returns, and 46% said they aimed to reduce portfolio volatility through investment in hedge funds.
Amy Bensted, head of hedge funds products at Preqin, said: “Investors are looking for hedge funds to do more than produce high returns.”
According the report, 67% of hedge fund investors were looking for returns of between 4% and 6%, while only 6% of investors sought returns of more than 10%.
Bensted also said the research showed investors were the most satisfied with returns they had ever been.
“The amount of money they invest in hedge funds has increased over recent years and is likely to grow significantly in the years to come,” she said.
Eighty-seven percent of investors, according to the survey, said they would maintain or increase their allocations to hedge funds over the next 12 months.
Bensted said managers of hedge funds who wanted to raise capital from these investors needed to market the positive impact their vehicle could have on an investor’s portfolio — apart from returns.
“Our findings also demonstrate that the frequent, broad comparisons of hedge fund performance to standard market indices, such as the S&P 500, are generally viewed as irrelevant by the institutions making the investments and judging their success, as these indices do not reflect the diversity of the hedge fund industry or its risk/return characteristics,” she said.