Last year was a bad year to be a hedge fund manager. Not only were markets weak, but investors pulled $34bn (€30.4bn) collectively from the sector, according to Preqin.

The alternatives data firm reported this week that investors were, unsurprisingly, unhappy: more than half (55%) of allocators polled by Preqin said their managers had failed to meet their expectations.

In addition, of the six alternative asset classes monitored by Preqin for its H1 2019 outlook report (private equity, private debt, hedge funds, infrastructure, real estate and natural resources), hedge funds were decidedly unpopular.

But it was not all bad news for hedge fund managers, according to the data company. Explaining the above numbers, it reported that “four out of five investors plan to maintain or increase their exposure to hedge funds in 2019”.

Preqin said it expected investors to “redeem and rebalance in favour of less correlated strategies” to protect against downside risk. It added that, although a “plateau” in overall assets under management for hedge funds could indicate less activity in the market, “beneath the surface we expect high levels of movement of capital”.

Amy Bensted, head of hedge funds at Preqin, said: “This is a pivotal moment for the hedge fund industry, as investors initiate a sea-change in their allocation patterns. After several years in which hedge fund returns have failed to keep pace with the historic equity bull market, investors felt they could be getting higher returns at a lower cost.”

However, capital protection and risk mitigation were coming to the forefront of investors’ minds, Bensted continued, which could play into the hands of some hedge fund managers. The vast majority of investors polled by Preqin said they expected their managers to perform in line with (46%) or better than (37%) expected in 2019.

In addition, 29% of investors indicated that they had long-term plans to increase their hedge fund allocations, when asked at the end of 2018 (see below). This compared to 19% a year earlier.

“This does come with a caveat, though,” Bensted concluded. “Investors are looking to rebalance their holdings, and many are trimming the number of managers and funds that they invest in as they seek to create more concentrated portfolios.

“Fund managers may be optimistic about their longer-term relationship with investors, but they will need to work hard in the coming months to effectively attract and retain capital.”

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