Credit Where It’s Due

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Hedge funds protect and demand for credit expected to surge.

London, New York, Hong Kong – 27 February, 2023 – BNP Paribas, Europe’s leading global bank, and its Prime Services business published today its 2023 Alternative Investment Survey: “Credit where it’s due.” BNP Paribas’ Capital Introduction Group surveyed 185 allocators in December 2022 and January 2023, who invest or advise on $1.4 trillion in hedge fund assets.

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This represents over one third of industry assets under management (AUM). The objective of the report is to better understand sentiment regarding performance and asset allocation plans to hedge funds and other alternative investments.

Ashley Wilson, Global Head of Prime Services at BNP Paribas, said: “The demand for credit and low beta strategies, in a rising rate environment, will require stable multi-asset prime counterparts with balance sheet capacity for which BNP Paribas Prime Services is ready and well positioned.”

Marlin Naidoo, Global Head of Capital Introduction at BNP Paribas, said: “The three-year outperformance of hedge funds versus a traditional 60/40 portfolio combined with the protection they delivered in 2022 should prompt investors to consider increasing hedge funds in their overall asset allocation as they prepare for the paradigm shift in markets. In doing so the focus will be on net returns versus fees.”

Key Findings Of BNPP's Alternative Investment Survey:

Bringing Back The 'Hedge': Hedge Funds Generated Positive Returns While Global Equity And Credit Markets Crashed

  • Respondents’ hedge fund portfolios protected in 2022 returning 1.10% on average, with one fifth achieving over 7.50% versus the MSCI World and the Bloomberg Global High Yield indices which were down over 17% and 12% respectively.
  • A quarter of responding investors met or outperformed their return target in 2022.
  • Pension funds outperformed relative to other investor types (+4.31% on average) while endowments and foundations were hit the hardest (down -1.25% on average).

Hedge Fund Asset Flows Are Expected To Make A Turnaround In 2023

  • 42% of allocators in our survey are expecting to increase their hedge fund allocation this year having remained flat last year.
  • Investors’ re-evaluation of a traditional 60% equity / 40% bond portfolio, amid rising rates; widening spreads and volatility, could benefit hedge fund flows.

Multi Strategy And Discretionary Macro To Top The Charts In 2023 With CTAs Expected To Retract.

  • A quarter of respondents expect multi strategy and discretionary macro to be the best performers on a net basis, continuing their streak from 2022.
  • CTAs, the best performer in 2022, are out of favour this year as 9% net of respondents predict it to be the worst performer in 2023.

The Credit U-Turn

  • Credit, one of the least in demand strategies at the start of 2022, emerges as the most sought-after hedge fund strategy with 41% of allocators looking to add it on a net basis.
  • 31% and 24% net of respondents are also looking to add to Long Only and Private Credit respectively.

Crossover Funds Come Under The Spotlight

  • Demand is slowing for crossover funds as only 3% of investors are looking to add, versus 15% last year.
  • Investors increasingly separate their private allocation from their hedge fund portfolio, and co-investment opportunities are becoming more widespread.

Females Flourish: Women & Minority-Owned Managers Are In Demand

  • 20% of respondents that are invested are looking to increase their allocations.
  • 18% of respondents are considering a first investment.
  • Renewed interest in the area comes as a result of recent high-profile, billion dollar female launches and allocators setting up dedicated female-focused vehicles

Net Returns Trump Fees

  • Investors that pay the highest fees generated the highest net returns. Allocators that generated over 10% net returns paid 6.13% in total fees last year while those that generated negative returns paid 2.27% in total fees, the driver being a 75% or 61bps difference in fund expenses.
  • Fund expenses have more than doubled on average year-on-year, increasing from 0.43% to 0.93%.
  • Allocators increasingly pivot to multi-manager offerings despite pass-through fee structures.

Hurdle Rates Are In Vogue

  • 66% of investors stated that hurdle rates are their preferred fee structure versus 15% last year, likely as a result of the rising interest rate environment and that they have a cash plus return target for their portfolio.

Liquidity Of Talent Comes To The Forefront

  • Investors now consider liquidity of talent versus liquidity of the underlying funds’ investments when it comes to fund liquidity terms of multi manager-manager platforms. Longer locked up capital provides stability and keeps liquidity of performing talent low. This coupled with the pass-through fee structure enables these firms to address the industry’s war for talent and maintain their edge.

About BNP Paribas

BNP Paribas is the European Union’s leading bank and key player in international banking. It operates in 65 countries and has nearly 190,000 employees, including nearly 145,000 in Europe.