From Value Walk
The question the industry faced entering 2015 is the same it faces entering 2016: Will institutional investors maintain their investments and continue to allocate more to hedge funds, and if so, at what rate? Our answer for 2015 was, “Yes. Barring a major financial market event, they will.However, if a major market event were to take place, then only the most defensive asset classes would gain new assets…”
Given the areas gaining assets in 2015 (multi-strategy, macro and managed futures, along with long/short equity), investor sentiment toward the industry fell somewhere in between this idea of continued general interest and the effects of elevated market stresses pushing investors toward diversified approaches and historically less correlated strategies. As we look to 2016, we have to consider the drivers of allocation decisions and composition of institutional portfolios across both traditional and alternative asset classes to understand the demand for new hedge fund investment.
Two large drivers of the composition of institutional portfolios are relative performance and asset allocation policy shifts. One of the largest influences on the distribution of assets in the last two years has been the relative strength of US equities. In the three years leading into 2015, in USD terms, the S&P 500 outperformed most major regional equity exposures and fixed income sectors. As a result, institutional portfolios could either passively become very overweight US equities, significantly adjust allocation policies (actively choose to become overweight US equities), or redistribute gains to remain within limits of desired exposures around the world and across asset classes. The first option is not desirable, the second takes time, but the can be executed in the near-term.
In 2015 alone, through Q3, traditional US equity products reporting to eVestment have seen outflows of $212 billion. In 2014, the universe had net outflows of $220 billion and in the last three years there has been nearly $630 billion removed from traditional US equity products. The relative strength and redistribution of gains from US equities has provided a base to support the hedge fund industry’s average growth of near $70 billion/year over the last three years.
The commitment of this redistributable capital is not an immediate process. If only a fraction of the traditional