SINGAPORE (March 2): Institutional investors are forecasting a 3.5% increase in new inflows during 2017 as the hedge fund industry kicked off the year at an all-time high for assets under management of US$3 trillion (S$4.3 trillion), according to Credit Suisse’s ninth annual hedge fund investor survey released today.

Entitled “Shifting Tides”, the study gathers responses on a number of topics including industry trends, forecasts, growth prospects and strategy preferences from over 320 institutional investors representing some US$1.3 trillion of hedge fund investments.  

Based on key findings from the 2017 Credit Suisse Annual Hedge Fund Investor Survey, global institutional investors remain strongly committed to hedge funds playing a role in their portfolios with 87% of respondents indicating they would maintain or increase their hedge fund exposures in the coming year.

However, Robert Leonard, managing director and global head of capital services at Credit Suisse, points out that these investors also appear to be “following through and making real changes to their hedge fund allocations”.

Net demand for equity long/short fundamental strategies, for instance, fell from fifth place last year to 13th place in the latest study results. At the same time, top equity sector strategies now include healthcare, financials and TMT (technology, media and communications) with 16%, 15% and 10% net demand respectively.  

The shift in strategy preferences indicate that investors are pivoting from broad-based equity strategies towards sector-focused ones, says Leonard, which he believes are better aligned with the long-term interests of fund managers.

There also appears to be headway being made in the push for better alignment of terms, he adds, with 61% of respondents reporting that they had at least one manager in their portfolio with a hurdle rate, while 57% said their management fees were lowered in the past 12 months.

Investor ambition has notably grown as well.

This year’s survey shows that only 30% of hedge fund investors said that their portfolios had met or exceeded their expectations, down 45% from the last. Additionally, investors target overall annual returns of 7.2% for their hedge fund portfolios in 2017, which is significantly above the industry average returns of 5.5% in 2016.

The top factors indicated for selecting hedge funds in an institutional portfolio were returns after fees, non-correlation with other investments, pedigree of risk takers and core team stability. Credit Suisse reveals that investors also considered risk management skills to be a very important factor in manager selection as well.

When asked about potentially significant developments that might occur this year, investors surveyed mentioned additional fund closures, more fee compression, better alignment of terms and a decrease in the amount of financial regulations impacting hedge funds.

“After years of discussion, it appears that there is now real progress being made by institutional investors and hedge fund managers in finding an equitable middle ground. While still an ongoing dialogue, it is nevertheless encouraging and a positive sign for the hedge fund industry going forward,” says Leonard.