Many institutional investors want to reduce their allocation to hedge funds and increase it to other alternatives, says a Prequin survey. Return expectations and reasons for investments differ among different alternatives.
In a survey with 460 institutional investors including pension funds, foundations, family offices, endowments and many others, hedge funds were generally badly graded while other alternatives such as private equity, private debt and infrastructure were much more favoured.
22 percent of investors want to reduce their allocation to hedge funds while 28 percent plan to increase it. For private equity, 51 percent want to increase it with only 5 percent planning to decrease it. Allocation to real estate will be increased by 34 percent of investors and decreased by 11 percent. Infrastructure allocation will be increased by 44 percent and decreased by 11 percent of participants. 28 percent of investors plan to increase their allocation to private debt while 14 percent plan to decrease it.
Performance expectations of institutional investors are at seven percent for hedge funds on average. Private equity is expected to achieve twice as much with about 15 percent performance on average. This might also be due to the investment goals at mind: The goal of private equity investments is to achieve an absolute return. Hedge funds might as well be purchased with a low correlation to traditional asset classes in mind, that allows investors to diversify and to reduce portfolio volatility.
For real estate, infrastructure and private debt, most institutional investors expect eight to nine percent return per year. They invest in real estate and infrastructure due to diversification reasons, as a protection against inflation and due to a reliable income stream. Private debt is bought for reliable income streams and high risk-adjusted returns.