2019 Institutional

Investor Survey

While sentiment toward hedge funds has become increasingly critical after a turbulent 2018, investors plan to continue to utilize hedge funds as a primary source of alpha generation in 2019 — and to increase their overall asset allocation to hedge funds — according to J.P. Morgan Capital Advisory Group’s 16th annual Institutional Investor survey. Below are five key insights into industry trends and investment behavior.

1. Is hedge fund performance meeting expectations?

After increased market volatility throughout 2018 contributed to poor performance across the hedge fund industry, 68% of survey respondents indicated their hedge fund portfolio underperformed its target return, a stark contrast with 2017. As a potential result, 80% of respondents indicated crowding as a top concern when investing in hedge funds, up from 62% last year. Yet, looking to 2019, most hedge fund investors expect to maintain — or even increase — their overall hedge fund allocation.

Q1-Desktop Created with Sketch. 32% of respondents’ hedge fund investments met or exceeded expected returns in 2018, in stark contrast to 2017.

2. Are investors expanding or streamlining their hedge fund portfolios?

Investors outside of banking/platforms and consultants consolidated their hedge fund portfolios in 2018, with nearly 40% reducing their number of allocations. Looking forward into 2019, 42% of respondents indicate they expect to increase the number of hedge fund investments they make.

Number of hedge fund allocations

Q2-1 Created with Sketch. of investors maintained or increased allocations in 2018 60%
Q2-2 Created with Sketch. of investors anticipate maintaining or increasing allocations in 2019 78%

3. Where are investors expecting to allocate capital in 2019?

Most investors plan to maintain or increase their hedge fund exposure in 2019. Capital invested in hedge funds will likely be reallocated across different strategies and managers, particularly away from long-biased equity strategies and into volatility, macro/relative value and credit strategies. From a geographic perspective, a continuing theme from 2018 will be a focus from hedge fund investors on the Asia Pacific region. The following figures show the largest expected changes to hedge fund strategies by investors in 2019.

Top 3: Anticipated increase in strategy exposure in 2019

Q3-1_Radial Created with Sketch.
Q3-1_Legend Created with Sketch. Volatility arbitrage Global macro Equity market neutral 44% 42% 34%

Top 3: Anticipated decrease in strategy exposure in 2019

Q3-2_Radial Created with Sketch.
Q3-2_Legend Created with Sketch. Long/short equity: fundamental Long only equity Event driven 32% 21% 19%

Anticipated increase in geographic exposure in 2019

Q3-Mobie Created with Sketch. Asia Pacific 47% Europe and United Kingdom 20% North America 19% Latin America 8% Middle East and North Africa 2%

4. What are investors’ views on hedge fund fee structures?

Investors negotiating fees has become increasingly prevalent when investing in hedge funds. For the first time in this survey’s history, more than half of all investors are currently negotiating or looking to negotiate fees paid to hedge fund managers. The standard “2 and 20” model has become outdated as allocators look to incentivize managers through alignments of interests such as with the “1 or 30” fee structure which has grown significantly in usage over 2017 and 2018. Nearly half of all respondents paid less than 1.5% on average in management fees to their hedge fund managers in 2018.

Hedge fund fee structures used by investors in 2018

Group 14 Created with Sketch. 17% 1 or 30 (management fee or performance fee over a hurdle) 67% Size discount (fee break on length of investment) 48% Loyalty discount (fee break on length of investment)

5. How do investors view emerging managers?

Allocating to new launches has been an increasing trend among hedge fund investors for a multitude of reasons, including diversification, access to lower fees, etc. However, the bar remains high for emerging managers to receive allocations. 69% of investors surveyed indicated willingness to consider allocating to new launches, in line with last year's survey results. Of those considering new launches, roughly half made at least two new launch allocations in 2018.

Q5 Created with Sketch. 69% of respondents consider investing in new launches.
final-cta Created with Sketch. Download the report

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