In an extract from Preqin’s recently released Hedge Fund Manager Outlook, H2 2017, we look at how managers have found the fundraising environment in 2017so far, and their predictions for the rest of the year.
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Following five successive quarters of outflows, hedge fund asset flows turned positive in Q1 2017, with investors putting $20bn in fresh capital to work in the asset class at the start of the year. These flows continued in the second quarter and across H1 2017 hedge funds recorded +$25bn in net flows and, aided by an extended run of industry-wide positive performance, assets under management (AUM) grew to $3.38tn, a record high.
With this return to inflows, fund managers have found the fundraising challenges easing at the start of 2017. Nearly half (47%) of those surveyed in June 2016 reported that fundraising had become more difficult over that year; in H1 2017, a significantly smaller proportion (30%) reported that fundraising was more challenging compared to 2016. Correspondingly, 60% of managers surveyed in June 2017 reported that their own firm AUM had increased over H1 (Fig. 1).
Institutional investors continue to be a vital source of capital for hedge fund managers. Preqin estimates that 58% of all capital invested in hedge funds is sourced from institutional investors – a level unchanged from our previous study of fund managers at the end of 2016. There has been much focus on the actions these investors have taken regarding their investments in hedge funds after a handful of $1bn-plus allocators decided to reduce or eliminate their exposure to the asset class over the past couple of years. Therefore, the fact that 96% of fund managers have reported that the proportion of capital coming from these investors has remained steady or increased over the first half of the year may reveal that some of these concerns are unfounded.
Fund managers found fundraising success in North America and Europe in H1 2017: 42% and 44% of managers that have investors in these regions respectively reported that the amount of capital coming from these investors had increased over the first six months of the year (Fig. 2). In comparison, just 14% and 11% reported that the level of capital from North America- and Europe-based investors respectively had fallen. Although fewer fund managers have seen increased capital from investors located in other regions globally, our study reveals that many hedge funds have gained investment from investors all over the world; for instance, approximately half (52% and 47%) of fund managers have investors based in Asia-Pacific and MENA respectively.
Despite a good start to the year in regards to asset flows and fundraising, hedge fund managers have a relatively cautious outlook on the year ahead. The largest proportion (39%) of fund managers believe asset flows will be negative over the rest of the year, despite the return to inflows at the start of 2017 (Fig. 3). However, in an uncertain environment, this outlook is decidedly mixed: a further 30% believe asset flows will be neutral and 31% positive.
When it comes to industry AUM, currently at record highs, fund managers again show a rather mixed outlook. With the combination of performance and flows impacting the size of the industry, the largest proportion (43%) of hedge funds believe industry AUM will remain relatively stable over the second half of the year (Fig. 4). However, slightly more fund managers (32%) believe AUM will increase further over the rest of the year than believe it will decline (25%).
Investor Satisfaction With Hedge Funds
More than half (55%) of investors interviewed in June 2017 reported that hedge funds have failed to meet
expectations in the past 12 months (Fig. 1). Although this is a large proportion, the level of surveyed investors reporting dissatisfaction with hedge fund performance has actually fallen from a high of 79% in mid-2016.
This reflects the improved performance of the hedge fund industry: the Preqin All-Strategies Hedge Fund benchmark has made only one monthly loss, and gained 10.78% over the past 12 months to June 2017. In comparison, the 12-month return of the benchmark in June 2016 was underwater at -0.61% following six months of losses in the previous year.
Although investors are increasingly recognizing the improved performance of hedge funds over a 12-month period, the longer-term performance of the sector is under question by many: 70% of investors surveyed by Preqin in June 2017 revealed that hedge funds have failed to meet expectations over a three-year period (Fig. 2).
With widespread dissatisfaction with performance, nearly half (46%) of investors surveyed by Preqin relayed a negative perception of the industry (Fig. 3). Similarly, more than three times as many investors have reduced confidence in hedge funds’ ability to achieve performance objectives than have increased confidence (37% and 12% respectively, Fig. 4). However, the level of investors losing confidence in hedge funds has also fallen since December 2016, similar to the trend seen in their satisfaction with performance.
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