Global hedge fund industry outlook for 2018

The hedge fund industry had an exhilarating ride in 2017, rebounding after a rocky performance in 2015-16, according to the latest survey of the global hedge fund industry conducted by Barclays’ Capital Solutions team. Both returns and flows registered positive numbers last year, and investors appear optimistic for 2018 as well.

The positive news for 2017 included a record high for assets under management (AUM) and positive net inflows after six consecutive quarters of outflows. In addition, returns improved markedly.

Hedge Fund Industry – Performance 2000-2017

Source: HFR

This represents a contrast from the June 2015 – March 2016 period, when the hedge fund industry experienced one of its worst drawdowns since 2000. In 2016, the industry suffered its first outflow since the 2008 financial crisis, with ~$70 billion in net outflows, or roughly 2% of the ~$3 trillion industry.

On the rebound

Hedge funds have enjoyed a quick recovery delivering 9.2% annualized returns since the drawdown. Hedge fund managers also have endeavoured to meet investor needs, including lower fees, increased transparency, and more customisable product offerings. Investors have taken note, and the industry returned to net inflows of ~$10 billion in 2017.

Overall Asset Allocation Intentions for 2018

Source: All figures refer to Barclays Strategic Consulting survey results only; Note: numbers exclude Consultants to avoid double-counting

Investor sentiment is expected to remain positive in 2018. More investors plan to increase allocations this year to hedge funds, as well as to private equity / venture capital, private credit, and real estate / infrastructure funds, rather than redeem these allocations. A total of 49% of investors plan to boost net allocations to hedge funds in 2018, with net positive values for alternative investments ranging from 19% to 35%. 

Industry Money-in-Play 2018

Source: Projections are based on Barclays Strategic Consulting 2018 Market Sizing Model, HFR. Excludes consultants to avoid double-counting.

Heavy inflows ahead

Given the positive backdrop, we expect the hedge fund industry to garner net inflows of about $40 billion in 2018. We also forecast that gross allocations will be about $330 billion and that most channels will be net allocators.

We expect public and private pensions, sovereign wealth funds, and private banks to be the largest net allocators at about $10 billion each. Meanwhile, we expect allocations from insurance and funds of hedge funds (FoHF) to be flat.

2018 Hedge Fund Strategy Preferences

Source: All figures refer to Barclays Strategic Consulting survey results only

By strategy, investor sentiment is most positive toward sector-focused equity long-short, which is likely due to its recent strong performance. Systematic (quantitative equity and commodity trading advisors/managed futures) and equity market neutral strategies also receive high investor interest.

Generalist equity long-short, multi-strategy, and event driven equity strategies will likely see the most redemption and intra-strategy asset rotation.

Overall, with stabilizing flows and the return of returns, hedge funds and their investors should expect to see stronger performance going into 2018.