Beacon Platform Inc. study shows 93% of institutional investors expect a rise of 10% or more in hedge fund sector fundraising over next three years
Pension funds, insurers, family offices, sovereign wealth funds, and wealth managers/retail investors all expected to boost allocations
But there are concerns about the quality of information and level of risk management, which hedge funds should take steps to address if they want to participate in this potential growth
London October 8, 2024 Institutional investors are predicting strong growth and attractive risk-adjusted returns in the hedge fund sector, and are planning to back expansion with increased allocations, new global research by Beacon Platform Inc. shows.
The study found almost all (93%) institutional investors questioned expect an increase in fundraising by hedge funds of 10% or more over the next three years with 14% predicting growth of more than 20%.
Beacon’s research with 100 pension funds, family offices, and insurance asset managers in the US, UK, Germany, Switzerland, France, Italy, Hong Kong, and Singapore found 91% expect the hedge fund industry to add more than $190 billion in assets this year with 26% expecting it to add between $250 billion and $500 billion.
Data from Hedge Fund Research earlier this year estimated total assets under management at hedge funds hit a record $4.6 trillion at the end of the first quarter this year. The research for Beacon, the open and cross-asset platform for portfolio analytics and risk management, shows all institutional investors questioned believe investing in hedge funds will be attractive in terms of risk-adjusted returns over the next five years, with 17% describing it as very attractive.
However, the surveyed group have some caveats and concerns about their hedge fund investments. A large majority (88%) of these investors agree that the quality of information and transparency in hedge funds needs to improve, with 22% saying it needs to improve dramatically. This may be a contributing factor to changes in fund allocations. A slightly similar amount (85%) have decided not to invest in a particular fund because of concerns over its risk management, and almost all (93%) think that this will be a growing trend.
That is supported by their views on what will happen with allocations to hedge fund strategies by different types of institutional investors, as the table below shows.
The research by Beacon found that the group was most optimistic about Pension Funds, expecting 81% to increase their hedge fund allocation by 10% or more, compared to 54% of Sovereign Wealth and 49% of Wealth Managers/Retail Investors.
Table 1: How do you see the allocation from the following investor types to hedge fund strategies changing over the next 3 years?
| Investor type | Increase more than 20% | Increase 10 to 20% | Increase up to 10% | Stay the same | Decrease up to 20% |
|---|---|---|---|---|---|
| Pension funds | 9% | 72% | 16% | 2% | – |
| Family offices | 15% | 19% | 59% | 3% | 1% |
| Insurers | 18% | 24% | 49% | 7% | 2% |
| Wealth managers/ retail investors | 7% | 42% | 41% | 7% | 3% |
| Sovereign wealth funds | 18% | 36% | 32% | 9% | 2% |
Asset Owners: How do you see the allocation from the following investor types to hedge fund strategies changing over the next 3 years?
Beacon’s research shows that the majority of institutional investors and wealth managers are expected to increase their allocation to hedge fund strategies as they look to diversify their portfolios and achieve better risk-adjusted returns. However, to capitalise on this growth, hedge funds clearly need to focus on the quality of their risk management and have high levels of transparency that investors are increasingly demanding before investing with them.
