Hedge fund returns falling and unlikely to bounce back soon
Returns from hedge funds have declined over the past five years and are not expected to return to levels seen in the 1990s in the short-term, despite optimism from hedge fund managers.
Most managers are forecasting returns from hedge funds in the range of 0 to 5 per cent above cash in the next 12 months, but believe longer term returns will reach targets of 5 to 10 per cent above cash, according to a survey conducted by Mercer Human Resources Consulting late last year.
However, Mercer analysts claim managers are adjusting to lower returns in the current environment and are unlikely to achieve levels of returns seen in previous years in the near future.
Fee increases were also forecast by the majority of respondents to the survey of 17 leading fund of hedge fund managers, partly to offset higher compliance and organisational costs.
Strategies being employed by hedge fund managers are also becoming more homogenous, the research found. Convertible bonds and risk arbitrage were popular inclusions, and all funds have increased exposure to the capital structure arbitrage strategy and other fixed income strategies.
Market neutral strategies were also favoured, as was exposure to less efficient markets such as Europe and Asia. Managers predict these trends will continue, along with preferences for long short credit, loan repackaging and catastrophe bonds.
The survey also found funds of hedge funds were becoming more diversified and their volatility and operating risks were dropping.
The number of hedge funds available globally is continuing to climb, the survey found, although managers noted a shortage of good quality hedge fund specialists in strategies such as statistical arbitrage, event-driven, long short credit and equity stock pricing.
Between 100 and 150 new managers set up hedge funds each month, with institutional investors supplying approximately half of the inflows to these funds. A decade ago 80 per cent of investment stemmed from high-net-worth individuals.
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