37% Institutional Investors Expect Hedge Fund Returns Of Over 15% CAGR

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Note – we found this survey last night but glad we read Meb Faber’s piece on it first as he discovered a shocking stat specifically Meb notes:

This is their estimate of the net returns they will receive from their hedge funds:

1% say 6-8%

32% say 9-11%

30% say 12-14%


32% say 15-17%

5% say 18% or more

Assuming the middle of each range that means the institutions are expecting their hedge funds to return 13% per year.

Have you lost your @!$%X# mind?


Oh, and by the way, a 13% NET return means you need to average gross returns of almost 20%.

We highlight a slightly different angle – still crazy – what will pensions do when these returns come NOWHERE near these assumptions? …. 37% Institutional Investors Expect Hedge Fund Returns Of Over 15% CAGR by BNY Mellon –

Key Findings

  • Private equity is the most1 popular alternative investment strategy, accounting for 37% of investors’ alternative exposure, followed by infrastructure and real estate, both just under 25%. Private equity is also set for the most growth, with 53% of investors saying they will increase their allocation over the next 12 months.
  • Alternative investments have generated strong returns for investors, with 93% saying they had met or exceeded expectations over the last 12 months. Private equity appears to have outperformed its alternative peers, with 97% saying returns had met or exceeded expectations.
  • Overall, the majority of respondents (65%) said that alternatives had returned at least 12%, with over a quarter (28%) reporting performance of 15% or more. Hedge funds have generated the most exceptional returns, with over a tenth (12%) of respondents saying net historical returns had been 18% or more.
  • Emerging markets now make up 31% of institutions’ alternative investment exposure, although further growth looks limited – investors are planning to allocate 34% of alternative investment to emerging markets.
  • Fees are firmly in investors’ sights, with 62% saying they will look for lower private equity fees in the next 12 months and 63% saying the same about hedge funds. Transparency and performance are also hot buttons for investors in both types of alternative, with around half saying they will focus on these areas when investing over the next 12 months.
  • In private equity, secondaries investments look set for growth, with 77% of investors seeking to increase their sales in the secondaries market and 63% looking to buy more commitments via secondaries.
  • In hedge funds, distressed strategies top the list of most attractive in the current and future environment: 68% of investors currently have exposure to this strategy and 57% rank it as one of the three most attractive strategies over the next 12 months.

Institutional Investors – The Asset Allocation Landscape

As alternative asset classes rise up the allocation agenda, we investigate the current climate and look to the future

Over the last few years, alternative investment strategies have earned their place in institutional investors’ portfolios. According to the Financial Times, total global alternative assets under management hit US$6.3 trillion in 2014 – an increase of 10% on 2013. And while alternatives still only represent a relatively small part of their overall investment allocations, their share is rising. Indeed, the category has more than doubled in size since 2005.

Institutional investors are increasingly finding that alternative investments can provide diversification benefits and move the needle on their overall returns, particularly as some more traditional asset classes have seen their returns fall in a low to zero interest rate environment.

“Change is being driven by two ends of the market: the large institutional investors and the retail investors. As a result, hedge funds are going to start looking more like asset managers with a suite of products – from limited partnership investments, managed accounts to UCITs and 40 Act funds.” – Bill Santos, Managing Director, HedgeMark

The Leading Alternative

The survey reveals that private equity (PE) currently accounts for the largest share of institutional investors’ alternative asset allocations, with 37.3% on average among our respondents. This reflects the PE industry’s continued strength and global growth, meaning institutional investors can now achieve geographic diversification through this type of investment, as well as diversification by company stage and – to some extent – by market cycle.

Infrastructure (24.9%) and real estate (23.6%) investments are second and third on average by share of alternatives allocations, with both averaging just under a quarter, and hedge funds make up around 14.2% of institutional investors’ alternatives exposure.

Institutional Investors

Happy Returns

According to our survey, institutional investors are generally satisfied with the returns they have generated through their alternatives exposure, with an overwhelming majority reporting that the performance of their investments in each of the alternative asset classes has either exceeded or met their expectations over the last 12 months.

Across all asset classes, an average of 56% said that their alternative investment returns had met their expectations, while 37% said that their expectations were exceeded. The findings for each class were fairly uniform, with the exception of real estate, for which a notable 14% felt that the asset class had underperformed their expectations. In terms of historical performance, some 65% of institutional investors report that alternative investments have returned at least 12% on average, including 28% that report performance of 15% or more. For infrastructure, 70% of respondents report historical performance of between 12% and 17%. PE is not far behind, with 67% of institutional investors citing this range.

Historically, hedge funds were the most likely to generate exceptional returns, with over a tenth (12%) of respondents reporting net returns of 18%. However, this is balanced by the fact that 12% said that they had generated returns of just 6% to 8%.

Meanwhile, real estate has delivered lower returns on average, with only 11% of respondents saying that this asset class generated 15% to 17% returns compared with 25%, 33% and 30% for infrastructure, hedge funds and PE respectively.

Institutional Investors

See full PDF below.


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