In the summer of 2023, BNP Paribas’ Capital Introduction team surveyed 82 hedge fund investors and managers (48 investors and 34 managers) to discuss an era of high, risk-free rates and its impact on hedge fund performance and terms. Below are the key findings of the survey:
Return expectations hike
In the current environment investors expect 2.9% more in returns for their portfolio of hedge fund investments targeting an annual return of 9.75% up from 6.85%. 62% of managers think they should outperform the risk free rate by 6% or more.
Managers request an extension
Allocators believe that managers should get 19 months on average to meet / be evaluated on the new return expectations while managers feel they need 29 months.
Cash makes cents
Manager respondents hold unencumbered cash of 33.9% on average. Two thirds of investor respondents ask managers for their target / typical level of unencumbered cash holdings while 42% of investors ask managers for the return they generated from cash holdings (a combination of unencumbered cash, short rebate and cash margin held at counterparties).
90% of investors believe that a hurdle rate should be in line with the risk free rate or with a relevant benchmark; 42% of fund managers agree.
Strategies turn over
Nearly half of the investor respondents are making strategy allocation changes as a result of the change in rates with credit, CTA and discretionary macro being the largest benefactors.