Hedge holdings increase despite underperforming equities. 2014 Bull?

English: Study on alternative investments by i...

Study on alternative investments by institutional investors. (Photo credit: Wikipedia)

Hedge fund managers have been putting new vehicles in motion, even though they have dropped behind equity markets in performance this year. Nevertheless, institutional investors such as pension funds have gained interest in hedge funds while the valuations of the equity market have sharply risen and expectations of future interest rates increases have threatened returns in bond markets.

More than $360 bn have come in this year from hedge funds via investor inflows and investment profits. This represents a 15.7 per cent increase in managed assets since 2012 ended, per numbers from Preqin, data provider. The growth is occurring as investors expect less of hedge fund returns but keep on seeing them as an effective means of portfolio diversification beyond equities and bonds. It is a beta bet. According to Amy Bensted, who is the leader of Preqin’s hedge funds, there is a current shift in the way investors look at hedge funds. Before 2008, investors looked at hedge funds as a way to obtain extra, over the top returns, which also went along with how hedge funds portrayed themselves.

Because of these factors, hedge fund managers are in a good position to have a second assertive year in 2014. One out of every four plans on starting new funds up the following year, and the vast majority are awaiting continued inflows from high net worth investors as well as from institutional investors.

Now, in contrast, hedge funds are not being looked at as a way to bring in very large, 20 per cent or more returns, but as vehicles to bring in smaller returns that are more stable and consistent over the long haul. Preqin will publish a global report of hedge funds in January that will include the data mentioned above. Within this data, it is evident that the assets of hedge funds have increased to close to $2.7 trillion this year, and North America is where nearly all of the growth has come from.

The increase also takes investor inflows into account, as these make up close to 5 per cent of the assets, which total $2.3 trillion managed at the end of 2012, and there are 10 to 11 per cent more that come from investment returns.  These returns are not nearly as impressive as those that are offered by equities. The all world index has gone up by around 17 per cent in the past year, while the S&P 500 in the US is up by close to 27 per cent. However, the Barclays Aggregate, which is used as a measure of the strength and scope of the bond market throughout the globe, has shown a 2 per cent decrease this year.

The survey, also indicates that there has never been a greater proportion of assets throughout the industry that come from institutional investors. This percentage is now at 66, which is 3 per cent higher than its equivalent value last year. While hedge funds used to solely be used by wealthy investors, ever since money has begun to flow in from public pension funds and corporate funds, managers have been forced to set up an infrastructure for compliance and reporting that has grown increasingly complex in recent years. Would you take a beta bet on hedge fund in your asset allocation for 2014?

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