After another volatile year for global markets, hedge funds alike have had to respond to the emergence of the omicron coronavirus variant and the highest inflationary pressures in almost 40 years. In 2021, the average hedge fund was up high single digits and the industry saw an estimated US$20 billion of net inflows, bringing industry assets to its peak of approximately US$4 trillion.
The Capital Introduction team within BNP Paribas’ Prime Services business surveyed 224 allocators (e.g. institutional end investors, intermediaries and private investors) from 16 countries (65% in Americas, 29% in EMEA and 6% in APAC) in December 2021 which invest or advise on US$1.2 trillion in hedge fund assets, representing approximately one-third of industry assets under management. The report provides insight to better understand investor sentiment with respect to performance and asset allocation plans to hedge funds and other alternative investments.
The hedge fund outlook for 2022 is optimistic with the average allocator in our survey looking to add almost a quarter of a billion dollars to hedge funds. We at BNP Paribas have built a world-class multi-asset prime services platform that is well-positioned to support this growth and achieve our ambition in becoming the largest European Prime Broker to global hedge funds. We are pleased to present these findings and grateful to all investor participants, clients and colleagues for their continued support.Ashley Wilson, Global Head of Prime Services at BNP Paribas
With rising rates and geopolitical uncertainty, our report shows that investors are increasing their allocations to low beta hedge funds that can achieve high single-digit returns. The strong net asset inflows we expect to see in 2022 will be met with some volatility as investors reallocate capital from traditional long only funds into hedge funds, move some capital out of hedge funds into private markets as well as rotate capital within the hedge fund space. We would like to thank our investor relationships globally for taking the time to participate in this survey and provide us with these invaluable insights.Marlin Naidoo, Global Head of Capital Introduction at BNP Paribas
Key findings of the 2022 Alternative Investment Survey:
The hedge fund booster
- The hedge fund outlook for 2022 is optimistic as investors seek to inject a further dose of capital into low beta strategies to protect against rising inflation.
- Over half of investor respondents plan to grow their hedge fund portfolio in 2022, with the average respondent looking to increase hedge fund exposure by US$244 million at the expense of long only funds across equity, credit and fixed income.
- Investors are expected to have met their return target for their hedge fund portfolio last year (average target of 8.32%), with 62% of respondents having already met this by end-November 2021, including 29% of which exceeded.
The rise of the e-investor: allocators adapt to the pandemic
- Three in every five respondents completed all due diligence virtually for previously unknown managers since the pandemic began.
- Three-quarters of survey participants made new allocations to previously known managers by completing some due diligence virtually.
It’s all about the multi-strat
- Multi-strategy is predicted to be the best performing strategy in 2022 after being the second best last year, falling short to event-driven.
- Multi-strategy is expected to see the second highest net inflows this year, following specialist equity long / short funds.
The quant comeback
- Quant equity and quant multi-strategy are expected to make a comeback with over one in ten investors looking to add to the space.
- These strategies outperformed the overall hedge fund industry last year having underperformed the previous three years.
The dawn of Eurasia
- Asia Pacific and Europe are the most sought after regions for 2022.
- Investors look to increase exposure to equity long / short funds in both these regions and have also expressed interest in expanding their European credit exposure.
Intermediaries drive the growth of customisation
- 45% of investors have customised mandates with managers up from 31% two years ago.
- Investment consultants report customisation for over half of their hedge fund assets and expect this to grow to two-thirds within the next five years. For fund of funds this is currently about one-third and expected to grow to almost half of their allocations by 2027.
The crypto creep
- 23% of investor respondents invest in cryptocurrency strategies with 15% expecting to increase their investment in 2022 and a further 29% of investors who do not currently invest looking to do so.
- Investors are still research-gathering and are focused on understanding alpha generation opportunities versus crypto beta, how best to position within their portfolio and the correct fee structure.
The green dollar strengthens as investors continue to drive the ESG agenda
- One-third of investor respondents’ state that they invest in ESG dedicated strategies with one-fifth of investors planning to increase this in 2022. A further 23% of investors are considering an investment.
- Diversity and inclusion remains an area of focus with 38% of respondents reporting investing in women and minority owned managers, up from 21% five years ago. 18% of respondents expect to grow this in 2022 while 20% of respondents are considering investing for the first time.
This marks the inaugural survey since the completion of the transfer of Deutsche Bank’s Global Prime Finance and Electronic Equities businesses to BNP Paribas. The migration of clients, technology and around 900 key staff globally was successfully completed at the end of 2021. This platform, along with the acquisition of Exane and the referral agreement to provide continuity of service to clients of Credit Suisse’s Prime Services and Derivatives Clearing business, enable BNP Paribas to offer clients globally a strong alternative to the US banks in Prime Services and Global Equities.