Financial services firm State Street recently published a report titled The Alpha Game that analyzed an October 2014 survey of 235 hedge fund executives regarding important industry trends and their outlook for the future conducted by Citigate Dewe Rogerson. The headline of the report is that these hedge fund insiders in general have a positive outlook about the prospects for the industry in 2015, and most anticipate continued growth in hedge fund inflows as well as expansion into new markets and product lines.
Increased capital flows to hedge funds
The State Street report points out that hedge fund managers are expecting increased capital flows over the next few years. The survey highlighted that nearly two-thirds (65%) of hedge fund managers anticipate ultra-high-net-worth investors will increase their hedge fund holdings, and almost the same number (63%) expect institutional investors will also up their alternative positions. Furthermore, over half (55%) of managers believe pension funds will increase their allocations to alternatives as they look for improved performance and greater diversification
Hedge fund managers also think the main reason for pension funds reducing exposure to hedge funds will be disappointment with returns. Nearly half (47%) noted this as their primary concern. The report noter: “This highlights the sharp focus on hedge funds’ ability to deliver value and align with institutional needs.”
Over half of the hedge fund professionals surveyed (53%) think the main reason why pension funds will invest more in hedge funds is to try and boost portfolio performance. Just over one-third (35%) think pension funds are mostly trying to improve portfolio diversification. Pension funds need to find higher returns to meet long-term obligations, and many anticipate that hedge funds will be a core part of their strategy to fill the gap. Moreover, hedge funds that can produce consistent high returns and have the right mix of innovative products will likely enjoy the most growth.
Diversifying investment strategies
The survey of hedge fund managers highlights that most plan to make changes to their business strategy over the next five years.
Well over half (60%) are planning to widen the range of investment strategies they offer to clients. Several managers noted is a direct response to demand from institutional investors for a broader range of investment strategies to help them achieve their long-term objectives.
Furthermore, more than one-third (37%) of hedge funds are planning to grow their international footprint to access opportunities in overseas markets. The report notes that this “also puts a strong focus on investing in the talent required to support an increasingly global operation.”