Hedge funds haven’t had a great year, but the level of satisfaction among institutional investors is at a historic high according to a recent Preqin survey. Only 16% of institutional investor said that hedge funds had not met their performance expectations in 2013, compared to 63% who said their needs had been met and 21% who felt that hedge fund performance had surpassed expectations.

Hedge funds have posted roughly 10% returns so far this year, compared to more than 25% returns from US equities. Even though this is an improvement from the 8.24% returns at this point last year, when hedge funds lag behind the stock market so much it may seem strange to find so many happy investors. Preqin wasn’t asking them to compare hedge funds with other investment classes and absolute performance isn’t the only performance requirement that hedge funds need to meet.

Absolute returns are not investors only objective

When asked what objectives are most important, only 29% of institutional investors said high absolute performance was their main concern. Low volatility (28%), returns that are uncorrelated to the stock market (15%), and returns that are uncorrelated to other alternative investments (3%) together make up almost half of all investors, and these goals can be met without beating the market.

Hedge Funds

hedge fund return objectives

“Investors are looking for more than just the size of the returns their funds are posting; strong risk-adjusted returns as well as consistency and low volatility of performance numbers are also key attributes sought from hedge fund Investments,” writes Peqin head of hedge fund products Amy Bensted. “Coupled with investors changing their outlook on their hedge fund investments and adjusting their returns expectations, we have also seen hedge funds perform consistently well over the past two years, which is also leading to increased confidence in the asset class.”

Hedge fund managers becoming financials fixers

Despite recent outflows, hedge funds could cross the $2 trillion AUM mark by the end of 2013, and the focus on absolute performance misses the fact that hedge fund managers are increasingly marketing themselves to institutional investors as jack-of-all-trade fixers who can take the time to understand a client’s specific needs and offer a range of services instead of just a few rather opaque financial products.