J.P. Morgan’s Prime Brokerage business indicated that hedge fund managers delivered a better performance in 2013 compared with the previous year in its 2014 Investor Sentiment Report released on March 28, a copy of which was reviewed by ValueWalk.

Hedge fund industry performance

The report also noted that the hedge fund industry underwent investor scrutiny because its performance is still lower than the results of developed equity markets. Last year, The S&P 500 and the Nikkei climbed 32% and 59%, respectively while the HFRI Fund Weighted Composite rose 9%. According to the report, hedge fund managers understood that investors do not only compare their performances with their peers in the industry, but also to equity indices.

Hedge fund

The analysts also noted that macro concerns, including the ongoing conflicts in the Middle East particularly in Egypt and Syria, the increasing volatility in emerging markets, and the interbank market liquidity crisis in China were not enough to stop the growth of equity markets. The Capital Introduction Group at J.P. Morgan surveyed almost 300 of the leading institutional investors to evaluate the trends and investment behavior of the hedge fund industry.

Pension funds are largest hedge fund investor

J.P. Morgan’s Capital Introduction Group found that 97% of the institutional investors who participated in the survey indicated their plans to maintain or increase the number of their hedge fund investments in 2014. Based on their responses, the group concluded the hedge fund industry will continue to grow this year.

The group found that pensions are the fastest growing investor segment and it is the largest contributor to the growth of the hedge fund industry.  As of September 30, 2013, the amount of assets invested by defined benefit plans in hedge funds increased faster than any other investment class.

Pensions

The 200 largest pension funds in the United States have $150 billion combined total direct investments in hedge funds and hedge funds-of funds. The amount was 10.3% higher from the previous year. J.P. Morgan’s Capital Introduction Group also learned that 88% of Pensions allocate more than $25 million per hedge fund investment.

Exposure strategies

J.P. Morgan’s Capital Introduction Group found that majority of institutional investors did not redeem capital from the hedge fund industry even in the midst of uncertainty, but they reduced their exposure to underperforming managers and strategies. Data from the Hedge Fund Research showed that around $6.3 billion flowed out of macro strategies last year, more than 75% of the outflows from systematic strategies.

Reduced Exposure

Institutional investors strategically changed their strategy exposures to further improve returns from hedge fund portfolios by investing to longer lock-up/hybrid opportunities and co-investment vehicles in 2013. Hybrid funds started to emerge as a trend among institutional investors in the latter part of 2012 and became more popular last year.

Increased Exposure

Last year, investors also became more interested in emerging hedge funds with less than $100 million assets under management (AUM). The group described 2014 as the most active year for hedge fund launches since prior to the financial crisis.

Hedge fund launches