84 Percent Of Investors Dumping Hedge Funds by Credit Suisse

Part I – Introduction and Executive Summary

Overview

The Credit Suisse Annual Global Hedge Fund Investor Survey published earlier this year was entitled “Staying the Course” and provided interesting insights into investors’ mindset towards hedge funds at the beginning of the year. Given the eventful first half of 2016, we also wanted to take a fresh look at investors’ hedge fund investment activity at the mid-year point as well as at their levels of interest going forward.

The Annual Investor Survey anticipated moderate growth for the hedge fund industry in 2016 with projected industry assets above $3 trillion by year end. But respondents also highlighted concerns over macro events, crowded trades and market liquidity as main industry threats.

Despite challenging headlines, our Mid-Year Survey of Hedge Fund Investor Sentiment indicates continued appetite to allocate to hedge funds in the second half of the year, and many of the strategies investors favored in the Annual Survey continue to remain in focus.

Our survey polls over 200 respondents representing nearly $700 billion in hedge fund investments.

Investors from all regions participated with a breakdown as follows:

84 Percent Of Investors Dumping Hedge Funds

Executive Summary – Watchful Waiting

  • More than 80% of respondents reported redeeming from hedge funds in the first half of 2016.
  • Some institutional investors, such as pension funds and endowments, had lower rates of redemptions than the average. 31% of pension funds surveyed had no redemptions, while 25% of endowments and foundations reported no redemption activity during the first half of the year.
  • Redemptions were selective and targeted at specific funds, rather than reducing exposure to the industry as a whole – over 60% of those who redeemed were driven by specific manager underperformance or an individual fund’s strategy drift.
  • Of those investors who did redeem from hedge funds during the first half of the year, 82% expect to recycle that capital to other hedge fund managers rather than other asset classes (9% reported being undecided as to where to allocate the recycled capital).
  • Looking ahead, 76% of US investors said that they would likely make allocations to hedge funds during the second half of the year. 86% of APAC investors and 64% of EMEA based investors indicated that they were also likely to do so.
  • The main drivers of future allocations? Opportunistic allocation driven by strategy or manager performance (60%), or continued outperformance of current hedge fund allocations (12%).
  • The top 3 most popular strategies being considered for second half allocations are Equity Long/Short, Equity Market Neutral and Global Macro, which were also three of the top strategies in our Annual Investor Survey earlier this year.
  • With respect to preferred structures for investing in hedge funds (other than a traditional Master/Feeder), investors indicated interest in Liquid Alternatives (13%), Risk Premia vehicles (10%), Co-Investment opportunities (8%) and Long-Only funds (7%).
  • Looking ahead, investors indicated the greatest appetite for Globally focused funds (67%) with investors also considering regional allocations to North America (57%), Developed Europe (41%) and then Asia-Pacific/ex-Japan (29%).

Part II – Reflecting on 1H2016 and Second Half Forecast

84 Percent Of Investors Dumping Hedge Funds

  • 84% of respondents redeemed from hedge funds in the first half of 2016.
  • Digging into drivers of redemptions, 53% of investors reported individual fund underperformance as a main driver, while 10% indicated specific fund strategy drift as their main reason for redeeming.
  • Only 9% said redemptions were a result of disappointment with their hedge fund portfolio in general.

84 Percent Of Investors Dumping Hedge Funds

  • Institutional investors are often considered to be the “stickiest” types of capital by hedge funds.
  • Pension fund investors indicated that they had the lowest rate of redemptions with 31% reporting that they had no redemptions during the first half of this year.
  • One quarter of endowments & foundations shared that they had no redemptions in their hedge fund portfolios during the first half of the year.
  • Family offices and fund of funds indicated a slightly higher rate of redemptions than the survey average.

84 Percent Of Investors Dumping Hedge Funds

  • 61% of investors indicate they are likely or very likely to redeem from hedge funds in the second half of the year, which is down from the 84% who redeemed in the first half of the year.

84 Percent Of Investors Dumping Hedge Funds

  • For investors who redeemed in the first half of 2016, 56% intend to recycle that capital to a combination of both existing and additional hedge fund managers. 19% of investors said that they intend to recycle those allocations by adding hedge fund managers, while 7% intend to reallocate to existing managers already in their portfolios.

84 Percent Of Investors Dumping Hedge Funds

  • Respondents indicated that hedge funds can still expect to receive additional capital in the second half of the year as 73% reported being “likely” or “very likely” to allocate during that time.

84 Percent Of Investors Dumping Hedge Funds

  • 46% of investors based in the US are “Very Likely” and 30% are “Likely” to allocate capital in the second half of the year. 64% of investors based in Europe and 86% of investors based in Asia said they would be “Very Likely” or “Likely” to allocate during that same time period.

84 Percent Of Investors Dumping Hedge Funds

  • Investors indicated that the most significant driver of potential future allocations will be opportunities driven by strategy or manager performance (60%).
  • 12% of investors cited continued outperformance of their current hedge fund portfolio to be the primary driver of their additional allocations going forward.
  • 5% said that they were waiting for more clarity on a number of macro issues before making any further allocations.

See full slides below.