Hedge funds are being viewed in a less positive light than other alternative investors, according to a Preqin alternative investment outlook report, and regulation is viewed as a positive attribute when making investment decisions.
Hedge funds lags behind private equity investments in positive rating
While private equity investments enjoyed a 51 percent positive rating, followed by real estate and infrastructure investments each with 48 percent positive ratings, hedge funds’ 33 percent positive ranking significantly lags. Most respondents to Preqin’s worldwide survey of professional investors noted that ambiguity towards hedge funds – 51 percent gave the investment a neutral ranking – was the most common response.
In terms of meeting professional investor expectations, hedge funds had the lowest ranking of all investments, with just 9 percent saying they met expectations while also having the highest negative ranking, with 27 percent of respondents saying the investment fell short of their expectations.
Hedge funds to receive additional capital
This said, respondents expect to put additional capital to work in hedge funds in the next twelve months. Of four major alternative investment categories, hedge funds had the lowest negative ranking when considering where investment capital was being allocated and the second highest positive ranking, with 34 percent saying they were allocating more to hedge funds in the next 12 months.
Increased regulation benefited hedge funds
The survey group of professional investors thought increased regulation benefited the industry, with particular emphasis in the hedge fund arena. 47 percent of institutional investors viewed regulation as beneficial to this investment category, while 28 percent, the next highest response, viewed regulation as beneficial in real estate investments. Very few professional investors viewed regulation as a negative, as real estate and infrastructure investors viewed regulation as a negative in 13 and 16 percent of instances, according to the survey.
In terms of decision drivers, hedge fund investments are driven by performance as the top consideration, followed by regulation and then fees associated with the investment. Contrast this with infrastructure investments, where decisions are primarily driven by investment opportunities, followed by the economic environment and fees.
Diving deeper into an institutional investor’s motivation, the strategy was the most significant investment decision driver across the board, quickly followed by past performance. Oddly, size of fund and length of track record graded low in the ranking of investment decision factors. Many professional investors are known to have strict minimum criteria based on the size and track record length before they will even consider that investment.