News Column

Preqin Report Illustrates Why Investors Choose to Invest In Hedge Funds and How They Measure Performance

June 19, 2014



WASHINGTON, June 19 -- The Managed Funds Association issued the following news release:

London-based research firm Preqin today released a special report "The Real Value of Hedge Fund Investment," offering new, comprehensive data on the goals institutional investors set for hedge fund allocations and how they measure a fund's performance.

"Preqin's report demonstrates the unique nature of each partnership between a fund and its investors, as they work to achieve a specific set of goals and objectives," said Managed Funds Association President and CEO Richard H. Baker. "Funds employ strategies and trading styles as unique as the objectives of the investors they partner with, and this report underscores the importance of viewing the industry not as a monolith but as a dynamic collection of funds with different strategic approaches. Investors are selecting specific strategies to meet goals that include steady absolute returns uncorrelated to equity markets, portfolio diversification, and risk management. The data in the report show that the majority of institutional investors are not chasing 'high returns' through their hedge fund allocations, and when measured against the actual objectives set forth by investment partners, hedge funds are performing quite well, with 84 percent of investors indicating funds have 'met or exceeded' expectations over the past year."

According to Preqin's Special Reporti, institutional investors steadily increased their allocation to hedge funds between December 2012 and April 2014, including "maiden" investments and increases to existing allocations.

Capital from institutional investors currently accounts for as much as 65 percent of assets under management in the hedge fund industry today.

Preqin Special Report: The Real Value of Hedge Fund Investment, June 2014

See map here (https://www.managedfunds.org/wp-content/uploads/2014/06/MFA-Statement-Preqin-Report_HedgeFundPerformance_06-2014.pdf)

Statement

These investors partner with hedge funds to achieve specific, unique goals within their investment portfolios. According to the Preqin data, key objectives most frequently cited by investors include: returns that are uncorrelated to equity markets, absolute returns in all markets, dampening portfolio volatility and diversifying their total portfolio.

Focusing on returns, Preqin found that "producing high returns, a perception many outside of the industry believe is the domain of the hedge fund, is a priority for just a small proportion (7%) of the investors that participated in Preqin's survey." As shown in the chart below, the absolute returns sought by investors from hedge funds are relatively modest. Two-thirds (67%) of investors indicated they seek annual returns between 4% and 6%.

Preqin Special Report: The Real Value of Hedge Fund Investment, June 2014

See map here (https://www.managedfunds.org/wp-content/uploads/2014/06/MFA-Statement-Preqin-Report_HedgeFundPerformance_06-2014.pdf)

Statement

How have hedge funds matched up to these expectations? According to the Preqin data, they have done quite well. Eighty four percent of investors queried feel that hedge funds have met or exceeded their returns expectations over the past 12 months.

Finally, the Preqin report focused on how institutional investors measure the performance of the funds they partner with against the broader industry. According to the report, 36% of investors use separate benchmarks to compare the separate strategies in their hedge fund portfolios. The hedge fund industry is comprised of thousands of diverse, unique funds employing various strategies and trading styles. Preqin found "it is this very variation from fund to fund which makes aggregating performance across all funds irrelevant for many investors." Further, while there is a tendency to compare hedge fund performance to that of a broader market index such as the S&P 500, nearly a quarter of the participants in the Preqin survey felt that public market indices such as the S&P 500 do not serve as a relevant benchmark for hedge fund performance.

More information, industry data and a copy of the Preqin Report referenced here is available on MFA's website www.managedfunds.org, a resource for all aspects of the global hedge fund and managed futures industry.

[Category: Financial Services]

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