Friday, March 4, 2016
Where do hedge fund investors want to put their money?
The demand for hedge funds continues. The recently released 2016 Credit Suisse hedge fund investor survey shows that over 80% of investors plan to maintain or increase their allocations to hedge funds this year. The survey also ranked the most popular hedge fund strategies as measured by their net demand. Equity market neutral filled the top two spots and equity long/short grabbed two of the top five positions. The only strategy that was outside of equity trading was global macro discretionary.
I find this very interesting because equity market neutral is really an attempt to gain the risk free rate of return plus alpha. We know the risk-free rate is still hovering close to zero, so you need to chase alpha. More money will be looking for the same set of opportunities. Markets may not be efficient, but we do know they are competitive and that easy market entry into an inefficiency will drive excess returns lower. The only reason to invest in market neutral is that you believe that there will be growing alpha opportunities that will match or exceed the extra cash moving into this style.
The long/short equity strategies are trying to do the same thing but with some variable beta exposure. You get the risk-free rate of return plus some beta and any alpha the manager can find. It is like holding equity plus cash in proportion to the amount of beta in the portfolio plus alpha on the equity trading. You may argue that is not the case, but it may be a close first approximation.
The global macro discretionary may be the only strategy in the top five which may give you a chance of gaining some unique diversification by looking at a wider range of investment alternatives. We have written before about the return profile of hedge funds in our post:
Most hedge funds have pay-offs similar to put writing. Managed futures and global macro will give you something different - divergent trading which produces positive convexity. It seems odd that at the current high level of uncertainty most investors want to stay close to the comfort zone of equity trading.