According to the most recent JP Morgan survey of Institutional investors, demand for hedge funds is increasing as investors continue to seek returns that beat the traditional market benchmarks.
“While sentiment toward hedge funds has become increasingly critical after a turbulent 2018, investors plan to continue to utilize hedge funds as a primary source of alpha generation in 2019 — and to increase their overall asset allocation to hedge funds” according to the survey.
A third of institutions that responded are going to boost allocations, which would be a significant uptick of 15 percent over last year. Only 13 percent plan to downsize their hedge fund positions. And bit over half (55%) will stay even year over year.
Mike Monforth at JPM said, “Hedge funds are positioned well and investors are becoming more aware of the value propositions they can offer in certain markets….. “It’s a diversification play.”
Investors remain concerned about hedge fund crowding, style drift and transparency, according to the survey. JPMorgan said it polled 227 investors with about $706 billion in hedge fund assets for its annual Institutional Investor Survey.
Fee pressure on the industry continues as according to the survey “more than half of all investors are currently negotiating or looking to negotiate fees paid to hedge fund managers. The standard “2 and 20” model has become outdated as allocators look to incentivize managers through alignments of interests such as with the “1 or 30” fee structure which has grown significantly in usage over 2017 and 2018. Nearly half of all respondents paid less than 1.5% on average in management fees to their hedge fund managers in 2018.”
Macroeconomic and credit strategies will likely see an uptick this year as well. While fundamental long-short equity, event-driven and managed-futures strategies will likely see outflows, according to the survey.
The survey found new launches continue to be an increasing trend among investors. Mostly for diversification and lower fees. “However, the bar remains high for emerging managers to receive allocations. 69% of investors surveyed indicated a willingness to consider allocating to new launches, in line with last year’s survey results. Of those considering new launches, roughly half made at least two new launch allocations in 2018” according to the data submitted by investors.