[box]Osman Kilic, of North Haven, a finance professor who is director of the Alternative Investments Institute at Quinnipiac University.[/box]

The biannual study conducted by the Quinnipiac University School of Business’ Alternative Investments Institute (AII) and the Connecticut Hedge Fund Association surveyed U.S.-based institutional investors, who together manage $1.12 trillion, on the state of the market, and found four clear trends:

  • Investors are favoring U.S. equities, private equity and hedge funds over fixed income and commodities.
  • Direct hedge fund investment is most common (64 percent of those surveyed), with some use of funds-of-funds (14 percent) and a mix of the two (21 percent). Sixty percent said they chose to invest with hedge fund managers to reduce risk with a diverse portfolio; 40 percent made that choice for the absolute return it offered. That finding is consistent with increasing institutionalization of the hedge fund industry.
  • The most popular strategies in Quinnipiac’s sample are event-driven, long/short equity and global macro funds.
  • More than 50 percent of investors surveyed had additional liquidity restrictions, such as side pockets or gates, which affected five percent or more of their hedge fund allocation during the financial crisis. But 60 percent of the survey’s sample said they’d seen no recent change in hedge fund liquidity restrictions, and a third reported a decline.

“Our survey results clearly show the current preference towards U.S. and Western European equity markets, as well as hedge funds and private equity,” said Osman Kilic, professor of finance at Quinnipiac and director of AII. “It was interesting that the least amount of respondents favor increasing their allocation to commodities. Performance of U.S. equities, as well as commodities since the beginning of the summer, appear to support our findings. The S&P 500 is up by 5.96 percent at the same time the CRY commodity index is down by 11.87 percent.”

For Bruce McGuire, president of the Connecticut Hedge Fund Association, the survey results show that investors remain bullish. “Despite the assertions of frequent industry critics,” he said, “recent data demonstrates institutional investor satisfaction with hedge funds is high and investors plan to maintain or increase existing allocations. In fact, the latest industry research found institutional investors are overwhelmingly satisfied with hedge fund performance in their portfolios and the industry’s ability to meet investor objectives. “

Asked for a general opinion of some common investment types, the survey respondents showed themselves to be strongly bullish on private equity, and generally favorable towards equity asset classes such as U.S. private equity and developed non-U.S. classes. They were split on emerging markets, and relatively neutral toward hedge funds as an asset class. No bearish views on commodities were expressed, but 58.2 percent of respondents were negative on fixed income.

Asked how they might see their allocations changing over the next year, investors—though bullish on U.S. equities—said they don’t plan to assign additional capital to those managers in the near term, instead favoring hedge fund and private equity managers. Given that result, the alternative investment industry is likely to grow into the near future.

The investors were also asked if they were shifting their allocations to favor specific geographic locations, and a clear trend emerged favoring Western Europe and lessening involvement in Russia. Forty percent remain bullish on U.S. equities, but as many favored reducing investment in the U.S. and Canada as favored increasing it.

Have U.S. Federal Reserve policies made investors more tolerant of risk? Only 21 percent said they’d become more willing to take risks, while equal 38 percentages reported either being more risk-averse or taking a neutral stance.

Within hedge funds, investors were asked about strategies they currently favor, and long/short equity, event-driven, global macro and multi-strategy managers are favored, with managed futures and general arbitrage receiving fewer allocations.

Two-thirds of Quinnipiac’s surveyed investors use a consultant to choose hedge funds, and the same percentage requires more than three years of performance data. Fifteen percent wanted to see one to three years of performance, and less than 20 percent were willing to invest with what might be considered “emerging managers.”

Respondents favor investing in large hedge funds, with 59 percent choosing those with more than more than $1 billion under management, 33 percent selecting funds with $100 million to $1 billion, and only eight percent funds in control of $100 million or less. The trend indicates that the hedge fund industry is consolidating, and investment is flowing to the largest firms, which have a better performance record, according to academic research.

During the financial crisis, a significant number of hedge fund investors report losing access to at least some of their investments. 32 percent of respondents said that they’d had more than 10 percent of their hedge funds under some kind of restriction (above and beyond the normal contracting environment). And 28 percent reported that five to 10 percent of their funds were restricted.

Of the investors, 57 percent are plan sponsors, 17 percent fund-of-funds, 13 percent endowment, nine percent private investors and four percent foundations. More than 35 percent of the investors surveyed manage at least $20 billion, and 80 percent manage at least $1 billion.

The Quinnipiac University School of Business Institutional Investor Survey (Fall 2014) is online here.

Posted by Chris

Leave a reply

Your email address will not be published. Required fields are marked *