The top reason for investing in hedge funds is again very straightforward, alpha generation. The percentage may vary between investor types, but the answer is always the same. This is especially true after 2018 when many hedge fund managers underperformed relative to expected returns. The expectations for return are consistently targeted around 5 and 9 percent with expected volatility in the 5-7 percent range. Investors are expecting for risk less than equities but slightly more than bonds with a return to risk ratio above one.
Investors are looking to add to four major asset class and style areas: credit, fixed income relative value, global macro, and volatility arbitrage. This is an interesting combination. Credit spreads are again tight after the January reversal, and there is continued concern with leverage. It seems that investors want to take advantage of dislocations in these markets if there is a sell-off. The volatility arbitrage is odd given the poor performance of these strategies during the last February volatility spike. There is high potential for negative skew events. Fixed income relative value is a variation on the credit story. Investors are looking for alternatives to duration risk. Finally, there is the strong interest in global macro. This may represent the desire for a defensive global strategy different from managed futures.