Institutional investors are favoring U.S. equities, private equity and hedge funds over fixed income and commodities.
That and three additional findings highlighted the biannual study conducted by the Hamden-based Quinnipiac University School of Business”™ Alternative Investments Institute and the 150-member Fairfield County-based Connecticut Hedge Fund Association.
The survey shines a light on the plans of U.S.-based institutional investors, who together manage $1.12 trillion.
Of those investors surveyed, more than 35 percent managed at least $20 billion and 80 percent managed at least $1 billion. Connecticut, according to multiple Web sources, is home to about one-third of all hedge fund activity globally.
The other findings included:
- Sixty percent of respondents 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, according to the poll.
- The most popular strategies in Quinnipiac”™s results were event-driven, long/short equity and global macro funds.
- More than 50 percent of investors surveyed had additional liquidity restrictions during the financial crisis, which affected 5 percent or more of their hedge fund allocation. But 60 percent of the survey”™s sample said they had seen no recent change in hedge fund liquidity restrictions, and one-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 the AII, in a press release announcing the survey results. “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.”
Bruce McGuire, president of the Connecticut Hedge Fund Association, in the press release said 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 common investment types, the survey respondents proved bullish on private equity and generally favorable toward 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 do not 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 also were asked if they were shifting their allocations to favor specific geographic locations. 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.
Two-thirds of Quinnipiac”™s surveyed investors used a consultant to choose hedge funds and the same percentage used more than three years of performance data. Fifteen percent wanted to see one to three years of performance; less than 20 percent were willing to invest with what might be considered “emerging managers.”
Respondents favored 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 8 percent with funds in control of $100 million or less. The trend indicates the hedge fund industry is consolidating, and investment is flowing to the largest firms, which have a better performance record, according to Quinnipiac.
During the financial crisis, a significant number of hedge fund investors reported losing access to at least some of their investments. Thirty-two percent of respondents said that they 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 5 percent to 10 percent of their funds were restricted.
