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Barclays Capital forecasts major changes in hedge fund allocations for 2012
16th January 2012...Reallocation of existing allocations across strategies and managers could be the big story in 2012 as money flows top 2007 figures. Despite lacklustre returns of many managers in 2011, investors remain committed to hedge funds, the study reveals.
BarCap estimates $80 billion in new capital will flow into the industry in 2012 with 56% of investors planning to increase their allocations compared with only 8% who say they plan to decrease them. “2012 has the potential to be the most significant year for new capital allocations to hedge funds since 2007,” says the report.
Investors are expected to reallocate $300 billion of hedge fund assets to new managers in 2012 as they shake up their portfolios following a year of disappointing performance, according to a report by Barclays Capital’s prime brokerage group.
While investors plan to commit new capital to hedge funds in 2012, they are also preparing to make significant changes to existing allocations. Around 40% of investors say they will reallocate capital currently invested in funds they consider to be poor performers. One-third have already put in redemption requests. Another 22% of investors are changing their strategy mix in response to recent market events.
BarCap estimates investors are likely to reallocate $300 billion of hedge fund assets. This means the total amount of capital in play over the next 12 months could be around $350-$400 billion. Liquid, tactical trading-oriented strategies are most likely to benefit from the reallocation of hedge fund capital, with 40%-50% of investors saying they plan to add more global macro and systematic/volatility funds to their portfolios.
Investors are also keen to increase allocations to emerging markets funds and event driven credit strategies. Equity hedge funds are expected to see the highest level of churn, with 30% of investors planning to reallocate capital among managers. Within equities, investors are looking for specialised products with a sector or geographic focus and those with low net market exposure.
Of the $80 billion in new inflows, about two-thirds is expected to come from institutional investors including pensions, insurance companies and endowments and foundations. Private investors are expected to represent one-third of all inflows. North American pensions are the largest allocators to hedge funds, accounting for $550 billion of total industry assets, up 80% from around $300 billion in 2009.
Global macro and systematic/volatility strategies are projected to account for two-thirds of new capital, capturing $40 billion and $15 billion of inflows respectively.
Liquidity is a top priority for investors, according to the survey. Around 90% of current hedge fund allocations have been to funds that have either no initial lock-up or only a one-year lock-up, and the majority of investors say they prefer to increase allocations to more liquid funds.
Three-quarters of investors also plan to change the ratio of large to small and mid-size managers in their hedge fund portfolios, with 80% saying they will increase allocations to small hedge funds and 60% planning to put more capital into mid-sized funds. This shift is already underway, with small and mid-sized funds capturing nearly 40% of inflows in 2011, compared with less than 20% in the previous year. “Smaller managers are frequently seen by investors to be more agile in adapting their existing strategies to generate alpha,” says Louis Molinari, head of capital solutions in prime services at Barclays Capital
The findings are based on a survey of 165 investors with around $500 billion allocated to hedge funds.
From Hedge Funds Review.
