Hedge Funds have reasons to be cheerful in 2021

Darren Sinden

HFM found that 63% of family offices and HNWI planned to increase their hedge fund allocations in the first half of 2021

After a difficult start to 2020 hedge funds finished the year on a high note and can look forward to the rest of 2021 with some optimism. Or so data from a survey of investors conducted by research house HFM and the Alternative Investment Management Association (AIMA) suggests.

The survey which was conducted in Q4 2020 polled investors that control assets of $3.80 trillion of which $156.0 billion is invested in hedge funds.

90% of those investors said that they were happy with the performance of their investment in the hedge fund space and 45% of respondents said that they intended to increase their allocations to the sector, while more than 50% of the investors said they would be maintaining their investment at current levels.

When questioned further, the group that was intending to increase its hedge fund exposure said that expectations of higher returns were the primary driver for their decision. 64% of this subset highlighted this as the main reason behind their choice to raise allocations.

Almost 40% of those looking to up their hedge fund investments were concerned about equity market valuations and wanted to diversify. Whilst 32% saw hedge fund investing a potential alternative to the fixed income space in an ultra-low interest rate environment.

There was also an expectation of a revival for so-called quant hedge funds which were hit hard during 2020. UK based Winton, managed by David Harding, saw its assets under management drop by $26.0 billion after a poor performance last year.

While the funds managed by Renaissance Technologies, one of the industries leading quant trading firms fell by between 22.62 and 33.58% during 2020. though rather notably the firms in house Medallion fund rose by 76% posting one of its best annual returns ever.

Despite those statistics, 31% of the investors surveyed said that they were considering an allocation to quant strategies. With those managers following systematic strategies seen as likely recipients for the money. News that likely to benefit Commodity Trading Advisors(CTAs) and the managed futures space.

Other strategies that asset allocators are considering putting money into are arbitrage and relative value, and global macro. With a quarter or more of the investors considering an investment into these fund styles.

Overall hedge funds finished 2020 with average returns of 12.30% their best performance as a group since 2009, and though the average equity-focused hedge fund outperformed the S&P 500 last year, the group as whole underperformed the US index by 4.0%.

Assets under management across the hedge fund industry rose to $3.50 trillion in 2020, a gain of 7.70%. HFM believes that hedge fund assets could hit 4.0 trillion by the end of Q1 2021.

In terms of the types of investors most likely to allocate to hedge funds this year, HFM found that 63% of family offices and HNWI planned to increase their hedge fund allocations in the first half of 2021.

The number of new hedge funds coming to the market appears to be slowing down, however, with just 90 launches in the second half of 2020. Out of a total of 274 for the year as a whole compared to the 373 new funds that were launched in 2019.

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