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Hedge funds were once a hot topic among allocators, but their popularity has waned. Institutional investors have no intention of increasing their allocations to the space, according to consultants Agecroft Partners.
These investors, which include pension funds, endowments and foundations, have “reached a saturation point where a portion of their assets are fully allocated to hedge funds,” said Agecroft founder and CEO. Don Steinbrugge said in his commentary on industry trends in 2024.
If so, the trend would reverse. Public pension funds will devote 6.5% of their assets to hedge operators in 2022, the Public Plan Database reports. This is up from 3.3% in 2010 and 1.8% at the beginning of this century. Hedge funds are generally expected to grow due to portfolio appreciation, but Steinbrugge said he expects that growth to slow from 8% to 6% a year as allocator investments taper off.
He also found that many pension plans are tilting their allocations toward more mid-sized hedge funds rather than the largest hedge funds. In fact, smaller and perhaps more nimble hedge managers have outperformed larger funds in recent years, he said, citing research from HFRI, which showed a 4.52% increase in the 12 months to November 2023. It was 3.30% vs.
But hedge funds overall have experienced outflows over the past few years, according to Nasdaq Investments, the exchange’s research arm. This equates to $68 billion by September 2023, followed by $112 billion in 2022. This represents 5.1% of the US’s $3.5 trillion in hedge assets.It may seem that
Investors have been complaining for some time about hedge funds’ single-digit returns (4.8% as of November). Hedge funds charge relatively high fees for the privilege of investing, so these results pale in the face of the stock market’s progress in 2023. Hedge funds point out that even when stocks plummet, as happened in 2022, they typically rise.
Perhaps as a result of such allocator concerns, the University of Cincinnati, for example, intends to reduce its exposure to hedge funds from 20% to 10% of the fund’s $1.3 billion portfolio. But not everyone is reducing their hedge fund exposure. The California Public Employees’ Retirement System stopped allocating $4 billion to hedge funds in 2014, but is considering returning.
This year, Agecroft’s report shows that long-short equity hedge managers, particularly those specializing in value and small- and mid-cap stocks, offset the risk of buying undervalued stocks by taking short positions in overvalued stocks. declared that hedge funds would do well. cap stock. Why: The firm expects tech growth stocks to increase significantly in 2023 before reverting to the mean. Then the superiors will decline and the weak will prosper.
For some reason, the Hedge Fund Confidence Index fell to 15.6 in the fourth quarter of last year from 21.6 in the previous quarter, below its historical average score of 17.7. The Alternative Investment Management Association survey surveyed 235 hedge funds around the world, asking them to rate their confidence in a fund’s outlook for the next 12 months on a scale of -50 to +50. I asked for it.
Looking ahead to 2024, Agecroft’s Steinbrugge predicted more consolidation in the sector, with better-performing hedge managers attracting more investment and weaker hedge managers struggling. “Underperforming operators are likely to face above-average reimbursements, leading some to go out of business,” he wrote.
Related article:
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Fund managers aim for the overlooked ‘middle ground’ of hedge funds
Tags: Agecroft, Alternative Investment Management Association, California Public Employees Retirement System, Don Steinbrugge, Hedge Fund Confidence Index, hedge funds, pension funds, University of Cincinnati
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