By Amanda Maine, J.D.
A new report issued by business intelligence provider HFM and the Alternative Investment Management Association (AIMA) revealed that over 90 percent of hedge fund investors were satisfied with their investments in 2020. However, the report warned that managers should be aware of heightened investor expectations. The report, Investor Intentions H1 21, surveyed 65 investors with $3.8 trillion in total investor assets ($156 billion of which was invested in hedge funds) and senior investor relations and marketing professionals from 135 hedge funds. The survey was conducted in the fourth quarter of 2020.
Investor sentiment. According to the survey, investor satisfaction was high with hedge funds’ performances in 2020, with most investors stating they were "very satisfied," higher than other alternative investment classes including private equity, private credit, and real estate. While private credit remains popular, some investors pointed to the lack of distressed opportunities in 2020 due to swift stimulus measures resulting in a short window to take advantage of them. Investor satisfaction was the highest among European investors, with North American investors not far behind.
The survey found that risk management is the number one objective for hedge fund managers, especially given the uncertainty caused by the COVID-19 pandemic. Towards the bottom of investor priorities are concerns about liquidity, which may cause competition from private market funds in 2021, the report said. However, according to investors, hedge funds are the best-placed alternative investment vehicle to deliver risk management, placing them in a stronger position than other alternative investment funds to satisfy their needs.
Allocation plans. The survey also found that private wealth investors have the largest portfolio allocation to hedge funds. While hedge funds in 2020 were no longer the largest alternative asset class as private equity and real estate gained ground and now account for larger shares of the typical investor portfolio, hedge funds remain the top choice for high net worth individuals. In addition, private wealth investors were the most likely to increase their hedge fund allocation in 2020. Institutions, on the other hand, were more focused on private markets than hedge funds. The report suggests that hedge fund managers consider adapting private market solutions such as co-investments to provide the kind of niche opportunities expected by institutions.
According to the survey, most allocators are optimistic about hedge fund returns in 2021. One-third of the investors surveyed regard hedge funds as a possible replacement for fixed income within their portfolios, and more than a third of investors plan to decrease their long-only fixed income allocation, indicating that they will be adding risk to their portfolios in 2021. The report recommends that hedge funds respond to this shift by highlighting their ability to manage risk in a sophisticated manner. In contrast, institutions plan little change to their portfolios.
Winning new business. The pandemic impacted how hedge fund managers reached out to potential new investors in 2020, the report found, with virtual meetings replacing in-person meetings. The most promising sources of new investor leads were referrals from existing clients and investment consultant referrals. Cold calling and emails proved to be unsuccessful strategies in the second half of 2020, according to the report. According to one fund of funds manager, "the proliferation of Zoom has allowed us to meet more managers than we normally would."
While confidence in resuming in-person meetings rose towards the end of the year, the report noted that a highly infectious new strain of COVID-19 and renewed lockdowns should cause managers to reassess their meeting strategies in 2021. For example, realistic hopes for travel in 2021 have faded, the report stated.
Takeaways. The report highlighted some key takeaways from the results of the survey. Due to strong hedge fund performances in 2020, there are higher levels of investor satisfaction in the industry than there has been in a while. In addition, the continued fallout from the pandemic has made risk management the number one priority for hedge fund investors, who believe that hedge funds are the best placed investment class to deliver this. As a result, hedge funds will be the asset class most likely to see inflows in 2021. The report cautions that managers must be adaptable in the face of changing government restrictions. Finally, investors must be willing to entertain virtual investment due diligence and operational due diligence, the report states.