Hedge fund returns haven’t been that inspiring in recent years. In fact, last year was the fifth year in a row that hedge funds failed to beat the widely followed S&P 500 index. With average hedge fund returns lagging benchmark indices year after year in recent times, one would think that investors may not be terribly enthusiastic about investing in hedge funds. But results from an annual survey of hedge fund managers and investors by Citi Investor Services reveal that hedge funds are set to attract strong capital inflow over the next few years. The Citi survey estimates that hedge fund assets could double, to $5.8 trillion, by the end of 2018, almost twice its current record asset size of $2.9 trillion.
Hedge Funds Viewed as Consultative Partners
One of the surprise findings from the survey was the changing reasons among institutional investors for investing in hedge funds. In the past, institutions mostly invested in hedge funds to diversify investments and to generate above average returns. According to the survey, many of these institutions now have their own asset management units, and in addition, employ sophisticated risk and portfolio management platforms. Through hedge fund investments, these institutional investors get access to position-level portfolio information of hedge funds, which the institutions can then use to construct their own customized portfolios at their asset management divisions.
Commenting on this evolving shift in investor objectives, Sandy Kaul, who is the US head of business advisory services at Citi, says investors are increasingly looking at hedge fund firms more as consultative partners to construct customized portfolios.
Institutional Investors to Drive Hedge Fund Asset Growth
Historically hedge funds have attracted the majority of their capital from family offices and wealthy individuals. Back in the year 2002 before the financial meltdown, this group of family offices and high net worth individuals contributed 80 percent of hedge fund capital. But the trend has shifted considerably in recent years, especially after the 2008 crisis. Institutional investors now account for two thirds of overall hedge fund capital and the Citi survey expects this trend to continue. The survey finds that by the end of 2018, institutional money allotted to hedge funds will account for 75 percent of hedge fund assets.
Job Market to Benefit
The finding from the Citi survey is very surprising. Expecting the hedge fund industry, already at a very high record level, to double in just five years is a bold prediction. Citi derived its findings through approximately 140 interviews with various participants connected to the hedge fund industry. If the estimates were to play out as laid out, it will no doubt provide a spark to the sagging hedge fund job market.