This analysis is by Bloomberg Intelligence Senior Private Equity & Hedge Fund Analyst Gaurav Patankar. It appeared first on the Bloomberg Terminal.
Low-correlation absolute-return hedge funds are among the few refuges as elevated correlations, illiquidity and volatility roil asset owners. Our analysis shows that a stronger supply of funds, a diversified alpha-set and increased institutionalization can help hedge fund managers regain lost ground with institutional investors. Hedge fund investment opportunities exist across strategies, geographies with less duration and without the crowding that can be seen in private-equity portfolios.
For hedge funds, the land of opportunity has been the USA
US-based hedge fund managers have performed the best over a three-year period, delivering 5.7% total returns, followed by EMEA at 4.7% and APAC at 3.6%. More recently, over the past year, EMEA-based managers have led with a 0.45% total return vs. minus 0.8% for the US and minus 3.63% for APAC-based managers.
Public pensions have room and need for hedge fund allocations
Public pensions are in desperate need of reducing duration on their alternatives portfolios because of higher interest rates and still generate mid- to high-single-digit absolute returns — making the return of hedge fund strategies imperative. Over the last few years, hedge funds have been whittled down from the portfolio allocations amid the public’s backlash toward hedge funds and as low rates juiced up private equity returns that weren’t marked to market. A vast majority of public funds we track report five or fewer hedge fund investments.
Our analysis points to a meaningful runway for growth in hedge fund allocations, mainly led by multi-strategy and macro funds.
Multi-strats take the baton from macro in new launches
The steady risk-reward in multi-strategy hedge funds and the need for asset owners to reduce duration and add liquidity has driven the demand for good multi-strategy hedge funds with higher Sharpe ratios and risk-reward. Currently, it is an oligopoly dominated by Millennium, Citadel, Point 72 and Balyasny among others. The supply response is coming through, as multi-strategy funds dominate in new launches, accounting for 30.8% in 1Q, with macro second at 23.1%.
EMEA hedge fund performance spurs fundraising with 50% share
The strong one-year performance of EMEA-based funds has spurred new launches, with the region leading globally with 50% in 1Q, an increase of 11.6% from the preceding quarter. APAC accounted for the smallest increase in new launches (11.5%) last quarter, while the Americas increased 38.6% from 4Q.
Institutional allocators need to think beyond equity hedge funds
Over 45% of institutional commitments to the $3.9 trillion hedge fund industry are equity-oriented (about $1.8 trillion), more than credit hedge (15%), event-driven (14%), macro (12%) and multi-strategy (11%). The key role of a hedge fund in an institutional portfolio is to deliver uncorrelated absolute returns. Pure equity hedge strategies have meaningful beta to the broader market. On the other hand, multi-strategy, macro and relative value strategies focus on idiosyncratic alpha with lower correlations.
As more capacity gets created with new multi-strategy launches, we anticipate greater allocation from institutional allocators as such strategies help reduce duration while improving the risk-reward equation.
Bloomberg
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