New research from Preqin shows that the majority of hedge fund investors are not looking for double digit returns from their hedge fund investments.
Preqin’s survey of over 100 institutional investors shows they are looking for their hedge fund portfolios to produce returns uncorrelated to equity markets (59% of investors named this), produce robust risk-adjusted returns (53% of investors) and dampen portfolio volatility (46% of investors).
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Investors Are Satisfied with Hedge Fund Performance
- Hedge funds are achieving the returns investors are seeking; in 2013, hedge funds produced a net return of 11.53%, and in the last 12 months they have achieved 7.87%.
- 84% of investors surveyed feel their hedge fund return expectations have been met or exceeded in the past 12 months.
- 80% of investors believe that portfolio risk would increase if they ceased investing in hedge funds.
- At least 95% of investors feel hedge funds have met their key objectives over a 12-month, 3-year and 5-year period.
- 87% of hedge fund investors are maintaining or increasing their allocations to the asset class in the next 12 months. Investors Increasingly See Public Indices as an Irrelevant Benchmark for Hedge Fund Success
- The largest proportion of investors (36%) stated that they think different benchmarks should be used for separate strategies in hedge fund portfolios.
- This may be influenced by the fact that 51% of investors stated that hedge funds are a diverse group of strategies and aggregating performance across styles is irrelevant to benchmarking.
- 63% of investors use an external hedge fund specific benchmark to assess their hedge fund portfolio’s performance.
- Although the S&P 500 is the most favored non-hedge fund specific benchmark among investors, with 19% of investors surveyed using it to assess hedge fund performance, nearly a quarter (24%) of investors stated that the S&P 500 and other public indices are no longer relevant to hedge fund performance.
Amy Bensted, head of hedge funds products, said: "Investors are looking for hedge funds to do more than produce high returns; in fact, it is their ability to produce risk-adjusted absolute returns which are uncorrelated to equity markets that appeals to these institutions. Investors are the most satisfied with returns they have ever been, with hedge funds having largely lived up to investors’ expectations on an absolute and risk-adjusted basis over the short, medium and longer term. The amount of money they invest in hedge funds has increased over recent years and is likely to grow significantly in the years to come.
"Hedge fund managers looking to raise capital from these investors need to market the positive impact that their vehicle can have on an investor’s portfolio outside of returns in order to attract an increasingly sophisticated investor base. Our findings also demonstrate that the frequent, broad comparisons of hedge fund performance to standard market indices, such as the S&P 500, are generally viewed as irrelevant by the institutions making the investments and judging their success, as these indices do not reflect the diversity of the hedge fund industry or its risk/return characteristics."
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