What Investors Want: A Paradigm Shift
In a recent article entitled “What Investors Want from Hedge Funds Now,” Standard & Poor’s argues that investors have begun to look at hedge funds in a new way. 2008 fundamentally altered the hedge fund business, and according to S&P, uncorrelated returns that outpace the market’s performance are no longer investors’ main focus.
This trend has continued to surface in the research that BHA has been conducting during the past several quarters. In interviews with investors of every size and in every category, BHA consistently finds that outsized returns are not investors’ main concern when selecting a hedge fund manager.
Of the investors BHA analysts interviewed during the past two months, 83 percent stressed that they were interested in funds that were offering quarterly liquidity or better. Interestingly, BHA data also suggests that more than 62 percent of investors interviewed during that same period are comfortable with a fund imposing a lock-up. This could indicate that investors are placing greater emphasis on building stronger and longer-lasting relationships with fund managers that are willing to offer more transparency and foster trusting partnerships.
The S&P article also indicated that investors are avoiding highly leveraged funds because, currently, leverage is seen as an unnecessary investment tool that needlessly increases risk. In a recent interview with a senior research analyst at a U.S. fund of hedge funds, BHA discovered that the firm was not considering any funds that were using more than 3x leverage to drive returns. The fund of funds does not believe the potential returns are worth the added risk of excess leverage.
It appears that while absolute returns used to be the driving force behind hedge fund investments, the paradigm has shifted. Funds that offer transparency, increased risk controls, and better liquidity terms are more attractive to investors as they begin to return to hedge funds with new expectations and new criteria for investment.