Taking a look into the crystal ball for the hedge fund industry in 2015
Research firm Preqin published a report this week titled Hedge Fund Industry Trend Forecast for 2015. In the report, Preqin’s Selina Sy discusses a survey of hedge fund professionals undertaken in late 2014, and highlights the trends and developments they identified as the most important for 2015.
Capital will continue to flow into hedge funds in 2015
Sy highlights that hedge fund professionals expect that industry assets under management are going to increase this year and top the $3.02 trillion industry AUM at year-end 2014. Of note, 63% of the surveyed fund managers offered a positive outlook on the hedge fund industry in 2015, even with lingering questions about industry fees and hedge fund performance in 2014. A solid quarter of institutional investors noted they planned to boost their hedge fund allocations in 2015, and a 40% investment consultants planned that they planned to recommend their clients increase their allocations to hedge funds in 2015.
2015 will be better than 2014
2014 was a bad year for hedge fund performance in all except a very few sectors, and Sy points out that the Preqin All-Strategies Hedge Fund benchmark saw its worst annual return since 2011. Interestingly, 65% of investors replied that hedge funds met or exceeded their expectations. Not surprisingly, industry professionals anticipate that performance will be better in 2015, with managers looking for substantially higher returns than last year.
However, 73% of hedge fund investment consultants and 33% of hedge fund investors surveyed reported that performance will remain a very important issue.
Hedge fund professionals still concerned with industry regulation
Sy also notes that regulation is a two-edged sword for the hedge fund industry. New regulations promulgated in various parts of the world has given hedge fund managers more opportunities in areas where some investments were highly restricted, but new regulations in other countries have led to several new compliance measures and regulatory burdens for fund managers in the alternatives space.
The Preqin survey makes it clear that regulation is still a major concern for fund managers and consultants in 2015, given that 58% of managers say that new regulations will have a negative impact on the industry, an 8% increase compared to last year. Interestingly, providing investors with good returns did not rank nearly as high as INVESTORS believe that their 3.78% return in 2014 (nearly 1000 basis points less than the S&P 500) “met or exceeded” their expectations. This is truly a shocking stat (as the chart below shows) especially after so many years of underperformance. Once can only imagine that investors’ patience will eventually run out if the fund industry cannot generate better returns.