German institutional investors are slowly returning to hedge funds and liquid alternatives, reversing a trend that has seen investors withdrawing from such strategies in a high interest rate environment.
Just over 20% of German institutional investors allocated capital to hedge funds and liquid alternatives in 2024, an uptick compared to 2023, according to the 2024 Investors Survey published by the Bundesverband Alternative Investments (BAI), the German alternative investments association.
The BAI market sentiment barometer shows that the performance of many hedge fund strategies has exceeded investor expectations over the past 12 months more than for any other asset class in the survey.
“[This points to] a trend reversal, and an important signal for the industry that many have been waiting for years,” BAI’s head of alternative markets Philipp Bunnenberg told IPE.
Large inflows of funds in hedge funds or liquid alternatives are unlikely as German investors tend to be “too cautious”, he added.
Last year, outflows from UCITS hedge funds strategies in Germany amounted to €19.4bn in the first half of the year, exceeding the total outflows of €17.6bn reached in the whole of 2022, as rising interest rates swung investments towards fixed income, according to asset management company Lupus alpha.
“Higher interest rates and inflation no longer play a dominant role in investment decisions [for German institutional investors]. Denominator effects and liquidity bottlenecks in the portfolios are also a thing of the past,” Bunnenberg said.
Limited partners (LPs) now consider regulations (41%), lack of transparency in private markets (38%) and long capital commitment period (36%) as the major challenges when investing in alternatives, according to the survey.
German institutional investors continue to increasingly diversify portfolios in niches such as credit, insurance-linked securities (ILS), venture capital, and real assets.
“One in two investors already allocates in six or more alternative asset classes – more than ever. This is largely due to new entries in infrastructure and private debt investments in the past two years,” Bunnenberg added.
For the first time this year, more investors have invested in infrastructure than in private equity in Germany.
“We expect the greatest demand for private debt and infrastructure strategies over the next 12 months. Private equity fundraising will also pick up again,” Bunnenberg said.
BAI surveyed 111 German institutional investors managing a total of €2.3trn in assets.
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