Key Takeaways
- • Long-short equity dominates allocator preferences, selected by 65% of respondents in Agecroft Partners' survey of 300 institutional allocators, up 1 percentage point from 2022, driven by confidence in managers' stock-selection capabilities and alpha generation.
- • Hedge funds face persistent capital outflows despite loyal institutional backing: January 2024 saw $14.3 billion in net redemptions (the second-largest year-start outflow since 2009), yet first-quarter 2024 returns of 5.6% fell short of the five-year average of 6.9%.
- • Public pension fund allocations to hedge funds have nearly doubled from 3.3% of assets in 2010 to 6.5% currently, signaling renewed institutional conviction despite sector-wide mediocre performance and redemption pressures.
- • CalPERS, which exited its $4 billion hedge fund allocation in 2014, is actively evaluating a return to the asset class, reflecting a broader shift in institutional sentiment toward selective hedge fund exposure.
Summary
Hedge funds continue to attract institutional capital despite mediocre returns and significant outflows, according to an Agecroft Partners survey of 300 allocators conducted to identify which strategies will capture investment flows in 2024. The consulting firm's research, led by founder and CEO Don Steinbrugge, provides a data-driven snapshot of allocator preferences at a time when the broader hedge fund industry faces substantial headwinds.
Capital flows reveal the sector's challenges: Nasdaq eVestment reported that hedge funds experienced net redemptions of $14.3 billion in January 2024, marking the second-largest year-opening outflow since 2009. This redemption pressure persisted into the first quarter, during which hedge funds generated returns of 5.6%—below the five-year quarterly average of 6.9%—according to Hedge Fund Research. Despite these unfavorable metrics, allocators maintain meaningful exposure to the asset class, suggesting that performance concerns have not entirely eroded institutional conviction.
Long-short equity strategies remain the clear allocator favorite, selected by 65% of survey respondents—a modest increase of 1 percentage point from the 2022 survey. This strategy, which pairs long positions in undervalued stocks with short positions in overvalued names (often ranked by recent performance within the S&P 500), appeals to allocators who retain confidence in skilled managers' ability to generate stock-selection alpha. Steinbrugge emphasized that investor sentiment reflects optimism regarding fund managers' capacity to extract returns through fundamental security analysis rather than market beta.
Notable shifts in institutional allocation patterns underscore renewed interest in hedge funds among major public pension systems. Public pension plans have nearly doubled their hedge fund allocations from 3.3% of total assets in 2010 to 6.5% currently, according to the Public Plan Database. Most significantly, the California Public Employees' Retirement System (CalPERS)—which divested its entire $4 billion hedge fund allocation in 2014—is now evaluating a potential return to the asset class. This reversal signals that even sophisticated institutional investors who previously exited hedge funds are reconsidering the role selective hedge fund exposure may play in diversified portfolios.
Capital flows reveal the sector's challenges: Nasdaq eVestment reported that hedge funds experienced net redemptions of $14.3 billion in January 2024, marking the second-largest year-opening outflow since 2009. This redemption pressure persisted into the first quarter, during which hedge funds generated returns of 5.6%—below the five-year quarterly average of 6.9%—according to Hedge Fund Research. Despite these unfavorable metrics, allocators maintain meaningful exposure to the asset class, suggesting that performance concerns have not entirely eroded institutional conviction.
Long-short equity strategies remain the clear allocator favorite, selected by 65% of survey respondents—a modest increase of 1 percentage point from the 2022 survey. This strategy, which pairs long positions in undervalued stocks with short positions in overvalued names (often ranked by recent performance within the S&P 500), appeals to allocators who retain confidence in skilled managers' ability to generate stock-selection alpha. Steinbrugge emphasized that investor sentiment reflects optimism regarding fund managers' capacity to extract returns through fundamental security analysis rather than market beta.
Notable shifts in institutional allocation patterns underscore renewed interest in hedge funds among major public pension systems. Public pension plans have nearly doubled their hedge fund allocations from 3.3% of total assets in 2010 to 6.5% currently, according to the Public Plan Database. Most significantly, the California Public Employees' Retirement System (CalPERS)—which divested its entire $4 billion hedge fund allocation in 2014—is now evaluating a potential return to the asset class. This reversal signals that even sophisticated institutional investors who previously exited hedge funds are reconsidering the role selective hedge fund exposure may play in diversified portfolios.
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