Disclosure: Our content isn't financial advice. Do your due diligence and speak to your financial advisor before making any investment decision. We may earn money from products reviewed. (Learn more)
Last year proved to be tough going for many hedge funds, with average returns hovering around zero. That said, aggregate assets under management continued to grow, though estimates vary about how much new money flowed into the industry. This likely stems from the fact that not all funds report performance and AUM data to the same research firms, as well as differences in methodology among those doing the counting.
According to Eurekahedge, for example, net investor allocations last year were $77 billion, more than double 2014’s total. Another firm, eVestment, reported that net inflows were $44 billion, a year-on-year decline of 50% (their data is included in the charts above and below). A third researcher, Preqin, said that inflows were $71.5 billion. Finally, HFR concluded that last year’s net allocations were $43.8 billion, 43% lower than in the prior period.
Continued interest in multi-strategy
By most accounts, the sector that attracted the most inflows during 2015 was multi-strategy (though, even then, there are some differences of opinion among researchers). Multi-strategy hedge fund managers tend to invest opportunistically in a variety of markets; in general, they seek to capitalize on their ability to nimbly maneuver among investments, as well as being diversified across asset classes.
For some smaller investors, this sector is often seen as an efficient and cheaper alternative to funds of funds, which invest in single-strategy hedge funds. Many FoFs market and charge for their expertise in researching and identifying talented managers (including those that might not be open to investments from smaller investors), as well as their ability to mix and match managers and strategies in an optimal manner.
Last year, according to Eurakahedge, multi-strategy funds saw their asset base increase by 12% to a record $ 21.8 billion, boosting AUM to $370.7 billion. EVestment notes that “broad multi-strategy” funds saw $55.4 billion in net new investments during the period, outpacing the prior year total by 25%. Separately, the firm noted in mid-December that such funds accounted for “70 percent of all global industry assets gained” since the start of 2015. A survey by Barclays of 110 funds managing $375 billion confirmed institutional interest and asset-growth in the sector.
Managed futures on the upswing
Other notable developments include increasing interest in managed futures, a topic that was discussed in detail in “CTA Investing: The Trend to Follow?” Despite the sector’s poor performance in recent years and 2015’s relatively unpromising start, a pick-up in returns as the year wore on and expectations about a changing economic and investing landscape have led many investors to bet that a reversal of fortunes is at hand.
Based on data from eVestment, managed futures registered net new allocations of $13.2 billion during 2015, in sharp contrast to the $35.2 billion in outflows that were seen in the year-ago period. In mid-December, ValueWalk highlighted data from Eurekahedge showing that CTA/managed futures hedge funds grew their asset base by 18%, “recording their highest level of investor inflows on record since 2006, with net investor allocations worth $27.8 billion.”
More optimism than pessimism
Looking ahead, opinions about the outlook for hedge fund investing are somewhat divided. As noted previously, lofty valuations and recent stock market turbulence is leading many investors to consider alternative investments. However, last year’s disappointing performance has undoubtedly weighed on sentiment. According to Preqin,
a third of surveyed investors said that returns in 2015 had not met their expectations, and the same proportion stated their confidence in the ability of hedge funds to meet their portfolio objectives had decreased over 2015. For the first time, a greater proportion of investors reported to Preqin that they plan to reduce the amount of capital they invest in hedge funds (32%) than plan to increase it (25%) in 2016.
But some prognosticators are more upbeat. EVestment believes that institutional demand will continue to drive flows into hedge funds this year:
The hedge fund industry is, barring the occurrence of an outlier event, in a decent position for another year of growth. Inflows should be supported by the continuing slow and steady reallocation of assets from traditional to alternative strategies. Investors responding to eVestment’s institutional allocation survey have indicated they anticipate increasing their exposure to hedge funds in 2016.
A survey of institutional investors supports the latter view. According to JPMorgan’s Capital Introduction Group, those polled remain very supportive of hedge funds. “Despite the problems that have plagued the industry, the vast majority has continued allocating heavily to hedge funds.” The investment bank noted that 91% of respondents planned new allocations to the sector in 2016, a 4-percentage point increase from the year-ago tally.
As always, opinions about hedge fund investing or any other investment approach tend to shift or harden depending on how asset managers perform and what happens in the broader investing environment. But if recent developments are anything to go by, it’s a good bet that investors’ interest in active managers and strategies that have the potential to do well when asset prices fall–as discussed here and here–will remain resilient.
Michael J. Panzner is a 30-year Wall Street veteran and the author of three books, including Financial Armageddon, which predicted the 2008 global financial crisis.
