A growing proportion of investors say they plan to decrease the size of hedge fund allocations in their portfolios, survey results from data provider Preqin showed on Wednesday, amid this year's lacklustre average returns.
More than a third, 35%, told the data provider they would shrink the proportion of hedge funds in their portfolios by up 10 percentage points this year from last, according to Preqin's report based on responses from 185 institutional investors.
Hedge funds returned an estimated 6% for the year to June 30, the report said, underperforming some benchmarks. Whereas, MSCI's 47-country world stock index, rose roughly 11% during this time frame. The S&P 500 also soared 15% in the same period, mainly due to a handful of mega-cap stocks such as Nvidia (NASDAQ:NVDA).
Hedge funds have performed in line with expectations, survey respondents said. Two-thirds anticipated they'd see 6% and 12% returns over the longer term, while a smaller percentage were looking for a 14%-to-16% return on investment and higher, Preqin's report said.
Just under half of investors said they would not change their portfolios. Of those that do plan on allocating more to hedge funds, 68% are looking to defer those decisions until 2025.
Investors cared more about risk-adjusted returns, or that performance should be relative to how much risk the hedge fund took, Preqin's report said.
While 43% of those polled said hedge funds should deliver high risk-adjusted returns, 16% put more emphasis on the absolute performance number reported.
Among the investors' top worries were stock market volatility, the higher interest rate environment and rocky currency markets.
Investors like hedge funds because they add diversification to portfolios, survey respondents said.
The hedge fund strategies favoured by survey respondents to present the most opportunity next year were stock and corporate bond trading hedge funds, the report said.
