By Lydia Tomkiw
Hedge fund searches have ticked up slightly in the first part of 2018 as investors eye downside protection, according to a new report.
During the first quarter, investors issued 177 new hedge fund searches, led by 52% of them scouting for long/short equity as part of their hunt, followed by 41% examining macro funds, and 30% looking at multi-strategy funds, according to Preqin’s count. That comes after approximately 150 searches in the same period of 2017, but still down from the 200-plus searches the industry had seen in first quarters past, as reported. Hedge fund of funds managers led the investor search pool, followed by family offices and private sector pension funds, according to the report.
Increased market volatility has helped push the overall pickup in interest around hedge funds, says Arvin Soh, portfolio manager at GAM Alternative Investments Solutions. “One of the things that’s also driving interest – we’ll see about assets eventually – [is that] fees have come down pretty meaningfully for the industry,” he says.
Some investors are addressing fees with existing managers as well, including the $3.2 billion San Antonio Fire and Police Pension Fund, which recently renegotiated its fee structure with hedge fund manager Carlson Capital, moving from 1.5% management and 20% performance fees to a 1% management fee and 30% performance fee if the hedge fund “hits its hurdle over its benchmark,” sister publication MandateWire reported last week.
But beyond fees, some investors are seeking protection, such as the $226.5 million Jewish Community Foundation of Greater Kansas City, whose 15% hedge fund allocation is meant “to minimize risk” rather than generate alpha, with the foundation recently updating its benchmarks to reflect this outlook, its CFO Kevin Taylor told MandateWire last week.
Investors overwhelming favored investments in primary funds, with 92% of searches choosing that route during the first quarter of 2018 versus just 16% searching for hedge funds of funds. The market may be responding, with 74 hedge funds launched during the first quarter of 2018, including a batch of $1 billion-plus, high-profile launches expected later in the year, as reported.
Macro hedge funds were also receiving a higher proportion of views on eVestment’s platform so far this year despite a few months of losses, the data provider reported.“People are doing a lot of looking – I don’t know if they are doing a lot of investing,” says Mark Doherty, managing principal at PivotalPath, an investment consultancy, of the macro space. Volatility should help the space generate the double-digit returns investors are looking for, and investors should be doing their due diligence on funds now, he adds.
Sector-based managers, including healthcare and technology focused firms, are also getting more looks than generalists. “People are appreciating the specialization,” Doherty says.
Another area that has continued to see growth is co-investing. The demand for co-investing and direct deals is accelerating, says David Frank, CEO and managing partner of hedge fund marketer Stonehaven.
And while risk premia products attracted a lot of attention over the last year, more blending is now happening, Soh says.
“Investors are saying, ‘O.K. I understand the value of these premia products but ultimately, it’s alternative beta… Some portion we want in premia to get you a baseline and another portion in strategies that really do see much more alpha and much less alternative beta,’” he says. “And then you combine those two… It all translates into a much more attractive fee stack.”
With searches ticking up slightly, and overall industry performance snapping back in April, there are cautious signs of optimism for the next quarters.
“Seems like people are a little bit happier with their hedge funds in 2018 than 2017,” Doherty says.