A new global survey commissioned by State Street amongst 235 hedge fund professionals reveals strong optimism within the industry. The findings show that respondents (55 percent) expect pension funds to increase their exposure to hedge fund strategies over the next five years. This figure increased to 63 percent when the question was asked more broadly about institutional investors increasing their exposure to hedge funds in the next five years.
Of the 55 percent of hedge fund professionals who expect pension funds to increase their allocation, 53 percent believe the main driver of this is the performance challenges facing investors’ portfolios. 35 percent believe it will be a growing focus on portfolio diversification and 13 percent who think it will be improved terms offered by hedge funds.
However, to really capitalise on the growing appetite for hedge fund strategies, nine out of ten industry professionals interviewed believe hedge funds will be required to more clearly demonstrate their value to prospective investors.
Maria Cantillon, global head alternative investment solutions sales at State Street said, “Despite the challenges facing the hedge fund industry, our findings show that many working in the sector are optimistic about its future prospects. This is being fuelled by challenges facing asset owners as they search for better returns and greater diversification. The hedge fund industry is maturing and becoming more transparent and competitive.”
In terms of how hedge fund professionals see their own firms changing over the next five years, 60 percent expect to broaden the range of investment strategies they manage; 37 percent anticipate that they will expand abroad and one in ten expects to acquire another company.
According to the survey, regulation will continue to have a significant impact on hedge fund managers. However, the full impact of Basel III is yet to be determined, with 29 percent of respondents believing that it will significantly increase their firm’s cost of financing, compared to 42 percent saying it wouldn’t and the remainder (29 percent) saying they don’t know. The findings also suggest growing competition from alternative mutual funds. Half of those interviewed believe that over the next five years, they will seize market share from traditional hedge fund strategies.