2018 Institutional
Investor Survey

Five Key Takeaways

While 2017 saw hedge funds deliver the best annual performance in over four years, they continued to underperform the broader markets. The J.P. Morgan Capital Advisory Group’s 15th annual institutional investor survey shares key insights into industry trends and investment behavior.

1. Has hedge fund performance in 2017 met investors’ expectations?
Investors have been lowering their return target for hedge fund investments. Given improved overall hedge fund performance in 2017, 70% of respondents indicated that their hedge fund investments achieved the return they were expecting this year.

Note: Figure based on selections from respondents in each respective year.
2. Have investors allocated to hedge funds in 2017?
2017 continued to witness the recycling of hedge fund capital within investors’ portfolios. Investors have been constantly adjusting and upgrading their hedge fund investments. In 2017, 83% of respondents made new allocations to hedge funds and 82% made redemptions from hedge funds.

Note: Circle Pie Chart Fig 1 Figure based on selections from 250 respondents.

Note: Circle Pie Chart Fig 2 Figure based on selections from 229 respondents.
3. Where are investors expecting to allocate capital in 2018?
While the majority of investors expect to maintain their hedge fund exposures in 2018, capital invested in hedge funds will be recycled and reallocated across different strategies and managers. Investors are more likely to add exposure to emerging markets, event driven, quantitative equity, options/volatility arbitrage and market neutral strategies.

Note: Figure based on selections from 223 respondents.

From a geographic perspective, investors seem to be more positive on Asia Pacific and Europe, and many of them plan to increase their exposure to these two regions.

Note: Figure based on selections from 219 respondents.

4. What are investors’ views on hedge fund fee structure?
Traditional “20 and 20” hedge fund fee structures continued to be challenged in 2017. The overwhelming majority of investors are paying less than 2% and 20% for their hedge fund investments. An increasing number of investors, especially those with large allocations, have negotiated or plan to negotiate fees with their hedge fund managers. In 2017, 45% of respondents were able to receive fee reductions that were based on the size of their investments (size discount), while 38% received fee discount given the length of their investments (loyalty discount). Though the “1 or 30” fee structure was widely discussed throughout the year, only a small percentage of investors actually implemented it in 2017.
Average fees investors pay to their hedge fund managers
Management fee <1% 1-1.24% 1.25-1.49% 1.50-1.74% 1.75-1.99% 2% >2% Total 15-17.49% 0% 4% 13% 15% 1% 0% 0% 33% 17.50-19.99% 1% 3% 8% 18% 14% 0% 0% 44% 20% 0% 0% 1% 5% 6% 2% 1% 15% >20% 0% 0% 0% 0% 0% 0% 0% 0% <15% 1% 3% 2% 1% 0% 0% 0% 8% 4% 9% 24% 39% 21% 2% 1% Total 100% Lowest % Highest %

Note: Figure based on selections from 224 respondents.

5. Will investors allocate capital to emerging managers?
Investors seem to be more opportunistic towards investing in new launches, though the bar is still very high for emerging managers to get into investors’ portfolios. For investors who did make allocations to new launches in 2017, the majority only added one or two managers. 27% of respondents in the survey expect their allocations to new launches to increase in 2018.

Note: Figure based on selections from respondents in each respective year.

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