August 11, 2010, 12:53 pm
Even as many are pulling their money out of hedge funds, institutional investors are planning to plow more cash in, according to a survey by Preqin, an alternative investment data provider.
That expected inflow could bring capital levels in the hedge fund industry back to their prefinancial crisis highs. Yet continued poor performance by hedge funds could quickly change those plans.
Preqin surveyed 50 leading institutional investors to ascertain their hedge fund investment plans for the coming year. The group found that 29 percent planned to allocate more money to hedge funds than they did in the previous 12 months, while 15 percent said they planned to decrease their investment. Over three to five years, 46 percent of the surveyed investors said they intended to increase their exposure to hedge funds.
An increase in institutional allocations would be a welcome development for the hedge fund industry, which has sustained net outflows of late. In the first quarter of the year, $11 billion left hedge fund coffers, erasing a $7.5 billion net inflow in the fourth quarter of 2009, according to data from Thomson Reuters Lipper TASS.
The net outflows come as the hedge fund industry is rebuilding from the hit it took in 2008 amid the financial crisis. The industry was down around 20 percent that year. Investors pulled billions of dollars out of the market, bringing the net asset value of the industry down to $1.3 trillion, from a peak of $1.8 trillion.
Net inflows into hedge funds went positive in the third quarter of last year and gained in the fourth quarter, so the latest net outflow has some in the industry concerned about the strength and viability of the recovery in asset levels.
Capital levels might increase at a faster clip if hedge funds would deliver robust returns. But institutional investors are also growing more skeptical about the ability of hedge funds to live up to the returns they delivered during boom times. Only 69 percent of investors surveyed said that the hedge funds within their portfolios had either met or exceeded their expectations. This is a drop from 73 percent of investors in a similar survey conducted by Preqin in 2009.
That is not surprising given how poorly hedge funds have performed this year. While hedge funds had a strong July (up 1.83 percent from June), they are still down 1.76 percent for the year, according to the Lipper Hedge Fund composite index. In contrast, investors buying the Standard & Poor’s 500-stock index are down 2.2 percent, which is a little better showing than hedge funds after subtracting management fees.
The poor performance of the industry as a whole could lead institutional investors to mix up their portfolios. Preqin found that 37 percent of those surveyed would be investing in a mixture of both existing and new managers while 23 percent would be adding funds with new managers only.
– Cyrus Sanati
From The New York Times published on August 11, 2010, 12:53 pm
