Hedge funds continue to attract inflows, says J.P. Morgan survey
23 February 2018 London
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Hedge funds continue to attract inflows, according to a J.P. Morgan 2018 Institutional Investor Survey.
Alessandra Tocco, global head of the capital advisory group at J.P. Morgan, in her review of the year, said that last year saw net capital inflows of $9.8 billion to hedge funds, bringing the total industry assets to $3.21 trillion.
Not all fund managers have benefited equally, though. Tocco points out that data from hedge fund research show managers with assets below $500 million have taken the vast majority of the net inflows. Those with over $1 billion in assets saw the most outflows.
The survey, the 15th of its name, showed the hedge fund industry is undergoing both structural and cyclical changes, according to Tocco.
She said: “Fund managers will continue to evolve as a result of the ever-changing market environment, technologies and regulations.”
“Luckily, most investors are still committed to their hedge fund investments and will continue to rebalance and upgrade their portfolios, more prudently and selectively.”
The survey covers a range of ways investors look at hedge funds including investor sentiment on hedge funds, concerns about their hedge fund investments, capital allocation to new launches and views on hedge fund fee structure.
Responses from 251 institutional investors were collected with aggregate assets invested in hedge funds close to $600 billion at the end of 2017. The key findings include the following.
Investor sentiment towards hedge funds has turned more positive than in years past. The percentage of respondents who are bullish on hedge funds in 2018 has increased, while the percentage of those who are bearish has fallen.
Crowding has been the primary concern for investors when allocating to hedge funds, while performance has continued to be the dominant reason for hedge fund redemptions. Around 60 percent of respondents believe there are too many hedge funds chasing limited opportunities to generate alpha.
Investors seem to be more opportunistic towards investing in new launches, though the bar is still very high for new launches to get into investors’ portfolios. For investors who did make allocations to new launches in 2017, the majority only added one or two managers; 27 percent of respondents said they expect allocations to new launches to increase in 2018.
Investors have been lowering their return target for hedge fund investments. Given improved performance in 2017, 70 percent of respondents indicated their hedge fund investments achieved the return they were expecting for the year.
While the majority of investors expect to maintain their hedge fund exposure in 2018, capital invested in hedge funds will be recycled and reallocated across different strategies and managers. Investors are more likely to add exposure to emerging markets, event-driven, quantitative equity, options/volatility arbitrage and market neutral strategies.
Traditional “two and 20” hedge fund fee structures (based on a 2 percent management fee and a 20 percent share of added value) continued to be challenged in 2017. Alpha will and should continue to be rewarded, comments Tocco, but investors are reluctant to pay full fees on more commoditised beta, which they believe was often disguised as alpha. But the overwhelming majority of investors are paying less than 2 percent and 20 percent for their hedge fund investments.
An increasing number of investors, especially those with large allocations, have negotiated or plan to negotiate fees with their hedge fund managers. In 2017, 45 percent of respondents said they were able to receive fee reductions based on the size of their investments (size discount), while 38 percent received a fee discount given the length of their investments (loyalty discount).
Alessandra Tocco, global head of the capital advisory group at J.P. Morgan, in her review of the year, said that last year saw net capital inflows of $9.8 billion to hedge funds, bringing the total industry assets to $3.21 trillion.
Not all fund managers have benefited equally, though. Tocco points out that data from hedge fund research show managers with assets below $500 million have taken the vast majority of the net inflows. Those with over $1 billion in assets saw the most outflows.
The survey, the 15th of its name, showed the hedge fund industry is undergoing both structural and cyclical changes, according to Tocco.
She said: “Fund managers will continue to evolve as a result of the ever-changing market environment, technologies and regulations.”
“Luckily, most investors are still committed to their hedge fund investments and will continue to rebalance and upgrade their portfolios, more prudently and selectively.”
The survey covers a range of ways investors look at hedge funds including investor sentiment on hedge funds, concerns about their hedge fund investments, capital allocation to new launches and views on hedge fund fee structure.
Responses from 251 institutional investors were collected with aggregate assets invested in hedge funds close to $600 billion at the end of 2017. The key findings include the following.
Investor sentiment towards hedge funds has turned more positive than in years past. The percentage of respondents who are bullish on hedge funds in 2018 has increased, while the percentage of those who are bearish has fallen.
Crowding has been the primary concern for investors when allocating to hedge funds, while performance has continued to be the dominant reason for hedge fund redemptions. Around 60 percent of respondents believe there are too many hedge funds chasing limited opportunities to generate alpha.
Investors seem to be more opportunistic towards investing in new launches, though the bar is still very high for new launches to get into investors’ portfolios. For investors who did make allocations to new launches in 2017, the majority only added one or two managers; 27 percent of respondents said they expect allocations to new launches to increase in 2018.
Investors have been lowering their return target for hedge fund investments. Given improved performance in 2017, 70 percent of respondents indicated their hedge fund investments achieved the return they were expecting for the year.
While the majority of investors expect to maintain their hedge fund exposure in 2018, capital invested in hedge funds will be recycled and reallocated across different strategies and managers. Investors are more likely to add exposure to emerging markets, event-driven, quantitative equity, options/volatility arbitrage and market neutral strategies.
Traditional “two and 20” hedge fund fee structures (based on a 2 percent management fee and a 20 percent share of added value) continued to be challenged in 2017. Alpha will and should continue to be rewarded, comments Tocco, but investors are reluctant to pay full fees on more commoditised beta, which they believe was often disguised as alpha. But the overwhelming majority of investors are paying less than 2 percent and 20 percent for their hedge fund investments.
An increasing number of investors, especially those with large allocations, have negotiated or plan to negotiate fees with their hedge fund managers. In 2017, 45 percent of respondents said they were able to receive fee reductions based on the size of their investments (size discount), while 38 percent received a fee discount given the length of their investments (loyalty discount).
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