“Organizational Concerns” Cited as Primary Reason for Replacing Hedge
“Respondents continue to display similar levels of economic optimism we’ve seen in our two previous quarterly surveys, with the majority saying the US economy is in a better place now than at the same time last year,” said
Endowments and foundations are still bullish on hedge fund strategies, with 65% of respondents noting hedge fund exposure greater than 10% of their total portfolio. When asked how they consider hedge funds within their investment programs, results were almost split evenly, with 53% saying, “a separate investment class,” and 47% noting, “an investment vehicle used to gain exposure within an asset class.”
“This represents the continued evolution in the way investors view hedge funds and their place within the portfolio.” said Konicki.
Asked about the primary role of the hedge funds within their portfolios, 39% of respondents said “diversification,” 22% noted “volatility mitigation,” and 18% cited “absolute return.” Thirty-five percent of endowments and foundations access hedge funds directly, 35% use a combination of direct investment and funds-of-funds, and 29% use only hedge funds-of-funds.
Asked what major factors drive their hedge fund selection, 69% said “correlation and fit within the portfolio,” 53% noted “compelling investment thesis,” and 43% said “track record.” “Fee structure,” “operational proficiency,” and “size of fund” rounded out the last three selection imperatives. Of interest, the reason cited by 26% of endowments and foundations for replacing a hedge fund manager was “organizational concerns,” followed by “performance concerns,” (24%) and “moving from funds-of-funds to direct investments” (21%).
While 35% of respondents indicated no preference around the preferred size of hedge fund managers, as measured by assets under management, 65% indicated a penchant for strategies with less than
Of note, over 30% of respondents felt that emerging markets equities hedge fund strategies were most likely to generate the highest returns over the next five to seven years, followed by multi-strategy and event driven. Interestingly, return expectations for credit strategies, which achieved outsized returns post 2008, have been reduced significantly relative to other strategies.
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