Ain’t no mountain high enough: Hedge funds aim higher amid rising rates

A survey by BNP Paribas' Capital Introduction team examines the era of high, risk-free interest rates and the impact on hedge fund performance.

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).

Hurdles jump

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.

Disclaimer for Capital Introduction surveys