Hedge fund investors are coming to terms with the likelihood of slower economic growth and a gradual uptick in interest rates in 2019, according to the latest BarclayHedge, MPI Hedge Fund Investor Survey. Those concerns could be driving a shift in investor interest toward global macro managed futures and fixed income and away from equity strategies in the year ahead.
Here are the key takeaways from our survey asking hedge fund investors what they expect in the year ahead:
Now, let’s dig into the details of the survey.
Question 1. Which alternatives sector do you think will garner the most interest from investors in 2019?
The hedge fund investors we surveyed believe Global Macro Managed Futures will see the most interest in 2019 (27%), up from 22 percent last year. Increased interest in Global Macro Managed Futures may be due to recent weakness across many commodity sectors, which could create opportunities to cash in on a bounce next year. It could also be driven by concern over slowing growth and its implication for equity strategies, each of which (Equity Hedged and Emerging/Frontier Markets) saw a fairly significant decrease in investor interest when compared to last year.
While interest in Fixed Income strategies came in fourth place (17%), there was a notable 15-percentage-point jump from last year, which may be driven by a reduced interest in Equity Hedged strategies, or eased concern over the frequency of interest rate hikes by the Federal Reserve.
Question 2. Which alternatives sector do you think will garner the most redemptions from investors in 2019?
More than a quarter of investors expect Equity Hedged strategies to suffer the most redemptions in 2019, which represented an 11-percentage point jump from last year. That outlook aligns with widespread expectations of lower economic growth and higher borrowing costs.
There was also a sharp rise in the percentage of investors (22%) who singled out Emerging Markets as likely to incur redemptions in 2019, compared with 11 percent, when investors were surveyed last year.
Question 3. What scenario below poses the greatest market risk over the next 12 months?
Concerns about slower global growth (38%) have spiked among hedge fund investors since we last asked the question in our March 2018 investor survey (12%). Similarly, rising interest rates (29%) and a stock market reversal (21%) top the list of investor concerns for 2019. Each, however, has subsided slightly since March (31% and 23% respectively).
Only 4 percent of investors polled expect inflation to cause trouble (down from 10% in March), and only a smattering (8%) listed “other” major concerns over the coming year, like debt contagion or civil conflict (down from 24% in March).
Question 4. Which, if any, of the newer hedge fund investment strategies listed below are you most considering allocating to or implementing in 2019?
Hedge fund investors have a strong appetite for funds that incorporate artificial intelligence and machine learning. That matches up with a theme from our July 2018 survey of hedge fund managers, in which a majority of managers said they use AI/machine learning to inform investment decisions.
Also telling is that only 6 percent of respondents consider allocating to cryptocurrency strategies, reflecting the declining values we've seen in the end of 2018, after peaks in 2017 and early 2018.
Question 5. How do you think overall allocations to hedge funds will fare in 2019?
Though slightly more survey respondents expect higher allocations to hedge funds, the responses to all three choices are similar enough to suggest that hedge funds may not receive a meaningful change in assets or interest from investors in 2019.
That’s hardly surprising, given that the hedge fund industry has been muddling through for most of the bull market, often underperforming indexes like the S&P 500, and fueling investor concerns over the fees associated with alternative investments. Investor responses this year, however, don’t suggest that we will see a migration away from hedge funds in 2019. With the bull market now being the longest on record and monetary policy normalizing, allocations to hedge funds could prove more valuable moving forward in diversified portfolios.
Question 6. What characteristic of alternative strategies do you think will provide the most value to investors in 2019?
Nearly half of our respondents think low-correlation will be the hedge fund characteristic that delivers the highest investor value in 2019. Around a quarter, by contrast, give the nod to either diversification or high risk-adjusted returns.
Hedge fund investors typically seek hedge fund strategies for their ability to deliver returns that are not correlative to equity market betas. That said, the strong preference for funds to deliver uncorrelated returns in 2019 matches up with growing investor concern over a global slow down and the expectation of investor withdrawal from equity strategies in the year ahead.
Survey methodology: The BarclayHedge, MPI Hedge Fund Investor Survey was sent to hedge fund investors and fund of hedge fund managers between Nov. 2-27, 2018. We received 116 responses from people working in funds-of-funds, multi-advisor futures funds, family offices, financial institutions, pensions, endowments, institutions, and other specialties. Respondents also included financial planners, wealth managers and registered investment advisers. Respondents were asked to select one answer for each question.
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Markov Processes International (MPI) is a leading independent provider of quantitative investment research, technology and analytics for the global investment management industry. MPI’s flagship Stylus solutions are used by hundreds of firms to make smarter investment research, portfolio construction and optimization, performance analysis, risk surveillance, distribution and reporting decisions. MPI Stylus can be delivered as a desktop, enterprise-hosted or cloud-deployed solution. MPI’s Enterprise Solutions team also offers customized configuration and implementation services to meet your organization’s specific needs. For more than 25 years, MPI has been a trusted, transparent and objective investment technology and insights partner to the world’s leading pensions, endowments, sovereign wealth funds, wealth management firms, hedge fund managers, fund of hedge fund managers, institutional consultants, investment advisors, asset managers and securities regulators. Follow us on Twitter @MarkovMPI, connect with us on LinkedIn and read the latest MPI research.