Investors to increase allocations to hedge funds in 2011

Over a third of investors intend to increase their allocations to hedge funds in 2011 and only 10% said they would decrease the money they put into the industry, according to a survey by Preqin.

Fund managers have made changes to the ways they structure and market funds in order to win back confidence from existing investors and to attract new money. Preqin’s study indicated 60% of investors felt there had been a change in fund structures that had benefited investors over 2010.

At the end of 2010 investor attitudes towards hedge funds remained positive. A good majority (67%) said they had not changed their outlook towards the industry since 2009. This is only a slight rise over the 2009 number of 66% who said they were confident in hedge funds to perform portfolio objectives.

Less than a quarter (22%) of surveyed investors said their confidence in hedge funds had risen over the past 12 months. This was attributed to concessions on the side of the manager and better performance in hedge fund portfolios.

The trend for improved investor satisfaction towards hedge fund performance is continuing, concluded Preqin. Almost three-quarters (72%) said stating returns had either exceeded or met expectations in 2010 compared with 73% in 2009 and 62% in 2008.

A further 19% said hedge funds had exceeded expectations in 2010. This was a significant increase from the 11% who said the same in 2009. Only 11% of investors said their confidence in hedge funds to perform portfolio objectives in 2010 fell.

Although investors are witnessing improvements in fund structures, Preqin research indicated there is room for improvement and wants more transparency at fund level and better alignment of liquidity terms.

The increasing confidence in hedge funds and satisfaction in the returns they generate is leading to a growth in new capital being earmarked for investment in hedge funds over the next 12 months, with 35% of those surveyed stating they plan to increase the amount of capital they invest in hedge funds over 2011. This capital will come from investors reallocating capital redeemed from hedge funds or put on the side during the past three years as well as investors increasing current allocations.

The study also said investors are becoming less cautious about making new investments, and are expecting to branch out from their current portfolios and look for new opportunities. Over half of investors plan to keep the amount they have invested in hedge funds the same in 2011. Net inflows over 2011 are expected to be positive and much higher than the last two years.

Institutional investors surveyed said global macro was the strategy they believed had the best potential for 2011. This could lead to inflows into the strategy over 2011.

Distressed funds continued to interest institutional investors with 60% choosing this strategy. Equal weight was given to credit, event driven and equity long/short.

The list of regions offering the most compelling opportunities for hedge fund investment in 2011 is topped by Asia, according to institutional investors, with nearly a third of all the surveyed institutions saying investment in Asia will be attractive over the next year. North and South America were also popular choices with only 15.8% surveyed believing Europe offers a compelling investment opportunity in 2011.

Only 11.8% of all investors surveyed by Preqin said they had a preference for Ucits hedge funds while 13.4% of institutional investors said they use managed accounts within their portfolios.

Although new structures are gaining traction with institutional investors, Preqin said it expected traditional structures of funds to remain dominant over the next 12 months. Over 70% of the investors surveyed said they invest directly in hedge funds and more than 40% invest through funds of hedge funds.