More than four in five institutional investors plan to
maintain or increase their investment in hedge funds despite
more of them saying alternative investing lost them money last
year, according to a new report.
JP Morgan’s annual hedge fund institutional
survey found 87% of respondents said they plan to increase or
maintain their current allocations to hedge funds in 2017,
compared to 81% who invested in these funds last year.
The paper, produced by the investment bank's prime brokerage
unit, also reported 75% of investors said their hedge
fund investments did not meet their target return in 2016.
This represents a significant increase from 2015 when
two-thirds of respondents reported their hedge fund portfolio
did not meet their return expectations.
"Investors have certainly lowered their return expectations
from hedge funds over the years," the report read.
The percentile of respondents who set a target return below
10% has increased to 66%, from 63% in 2015 and 46% in 2014, the
Some 31% of survey participants believed the main reason for
hedge fund underperformance is industry crowding, with too many
hedge funds chasing limited opportunities.
Meanwhile, 21% pointed to macroeconomic factors as the
primary factor for underperformance.
"Investors continued to allocate to hedge funds in 2016
despite performance challenges and increased scrutiny," said
Alessandro Tocco, managing director and global head of JP
Morgan’s Capital Advisory Group.
"In aggregate, hedge funds underperformed major market
indices and exhibited elevated levels of correlations to equity
More than 90% of the respondents who increased hedge fund
allocations in 2016 did so by investing in new hedge fund
managers, while 60% increased allocations to existing hedge
The survey also exposed how 80% of respondents increased
last year their number of strategies, up from about 70% over
the past few years. The strategies for the new allocations were
led by distressed credit, global macro, quantitative and
fundamental long short equity managers.
Fundamental long short equity remains the most popular
strategy, with close to 90% of survey participants investing
in the model in 2016. This is expected to see the most
turnover in 2017, with 20% of respondents intending to
increase allocations to the strategy.
Some 90% anticipate lower hedge fund fees in 2017, indicting
further fee pressure on managers.
Two thirds of respondents anticipate the hedge fund industry
will continue to consolidate and expect to see more
implementation of hurdle rates by fund managers.
Some 234 institutional investors participated in JP
Morgan’s 2017 Institutional Investor Survey,
representing approximately $750 billion in hedge fund assets
The global hedge fund industry returned an average of 1.16%
in January, producing its eleventh month of positive
performance in the past year, according to the latest report by
eVestment on February 10.
Over 70% of all hedge funds produced positive results for
the second consecutive month.