Great expectations: investors bet on alpha in new rates regime

BNP Paribas, Europe’s leading global bank, and its Prime Services business published today its annual 2024 Alternative Investment Survey.

BNP Paribas’ Capital Introduction Group surveyed 238 allocators in December 2023 and January 2024, who invest or advise on $1.2 trillion in hedge fund assets. This amount represents about one-third of industry assets under management (HF AUM).

Ashley Wilson, Global Head of Prime Services at BNP Paribas, said: “BNP Paribas credit prime platform is well positioned to support the continued growth of credit strategies as highlighted in our survey this year. We have integrated repo into prime enhancing our borrow and financing solutions which will help our clients execute their strategies and deliver returns to their investors. We are encouraged to see more allocators considering quant multi strategy, as these managers have clearly differentiated themselves in the past three years, however limited capacity in these funds will remain an obstacle for investors akin to that of the larger multi manager platforms.”

Marlin Naidoo, Global Head of Capital Introduction at BNP Paribas, added: “Allocators are starting to position for an era where alpha and diversification are finally expected to deliver strong returns, as they anticipate a departure from the past decade’s US equities dominance. Whether through asset allocation changes or a portable alpha implementation, this pivot spells opportunity for hedge funds.”

Key findings of BNPP’s Alternative Investment Survey:

Hedge fund performance: 2023 flipped 2022 on its head

• In 2023, the market soared with the MSCI World returning 24% whilst hedge funds returned 7.6%; contrasting 2022 when the market struggled and hedge funds protected capital.
• Equity long/short focused on Americas or TMT led the way for most of our responding investors as the best performing strategy – precisely what had struggled most the year before.
• Conversely, discretionary macro and CTAs were the worst performers in respondents’ portfolios, having topped the charts in 2022.
• Over the full 24 month period (2022 and 2023), the average hedge fund outperformed global equity markets by 5.72%.

Investors back hedge funds as we shift into the alpha era

• For most of the past decade, hedge funds faced headwinds to generate alpha as a result of zero interest rates and subdued volatility. In 2023, respondents reported that their hedge fund portfolios returned 6.67%, 1.5% shy of their target return.
• Historical analysis shows hedge funds perform well in periods of high, stable rates, as a result survey respondents have pushed up their return targets by 161bps since 2022 from 7.45% to 9.06%; the highest level it’s been at in more than 10 years as they anticipate moving into a high stable rate environment: the alpha era.
• Perhaps unsurprising given (1) hedge fund underperformance versus their expected returns in prior years, (2) investors taking profits from their hedge funds to rebalance their portfolios following 2022 outperformance versus other investments and (3) five percent risk free rates, last year saw up to US$100 billion of net outflows.
• Nevertheless, for the year ahead, almost half of our respondents are looking to contribute to hedge funds, expecting to add $17bn on a net basis in 2024 up 70% from the $10 billion net they added in 2023.

Credit remains the most sought-after strategy

• Continuing the trend from our survey last year, credit strategies remain the most sought after in 2024 with 33% of respondents looking to add on a net basis.
• As predicated in our 2023 survey, credit was the number one strategy allocators added to last year; however, the Capital Introduction team did not observe allocators investing as many dollars as they planned to. Only 21% of respondents surveyed added to credit in 2023, whereas in our survey last year 48% had intended to do so.

China exodus slowing down in 2024

• The world’s second largest economy has slowed down in recent years, following the Covid pandemic and the more recent crash in the property market.
• Last year, 42% of investors on a net basis pulled capital from China-focused hedge fund managers.
• This exodus of capital is expected to slow down in 2024, with only 6% of investors on a net basis looking to redeem.

SMAs on the rise

• One quarter of our survey respondents invest in some of their hedge funds via separately managed accounts (SMAs), this accounts for over one third of their hedge fund assets.
• This is expected to grow in 2024 with 13% of allocators looking to add to hedge funds via an SMA structure, with half of these being first time SMA allocators.

Hurdle rates are a priority

• The BNP Paribas Capital Introduction team has noted the increased demand for hurdle rates when speaking with investors, as part of the performance versus risk free rate discussion.
• 28% of respondents scored hurdle rates as high priority when making new allocations.
• Of those who ranked hurdle rates as high priority, respondents have 31% of their portfolio, by assets, invested with a hurdle rate whilst the average respondents has 19% of their portfolio invested with a hurdle.
• Nonetheless investors remain focused on better aligned fee structures with almost three quarters of responding investors saying they would overlook their preferred fee structure in favour of managers with outstanding performance, whilst only 9% said they would under no circumstances allocate without a favourable fee structure in place.

Multi manager platforms in the spotlight

• On one hand, some investors expect more consolidation of the hedge fund industry into multi manager platforms as well as acquisitions amongst multi manager platforms. It follows that the war for talent will continue to be waged through increased pay-outs, there will be fewer independent launches, more fund closures and investors will battle for access resulting in further proliferation of restrictive liquidity and higher fees.
• On the other hand, some investors believe single managers will once again find their value proposition and expect a reversal of flows away from multi managers. These allocators question whether liquidity and fees are commensurate with returns and risk.
• Investor share amongst pass-through structures dips below 50% while managers with no pass-through fees outperform in 2023 on a net basis reversing the trend from the previous two years.

Quant multi strategy: An alternative or complement to multi manager platforms

• Quant multi strategy and quant equity market neutral funds have similar risk return, beta and diversification profiles to multi manager platforms and are less impacted by the war for talent.
• Over the past 3 years these managers have delivered strong uncorrelated returns, annualizing low double digits and some allocators are noticing.
• Given there is a meaningful percentage allocated to quant in many multi manager platforms, the decision not to invest in quant for lack of understanding the “black box” if you do invest in multi managers should provide food for thought for allocators.

Of the respondents, Institutional end investors account for 25% of respondents and 30% of HF AUM [60 investors / US$ 357 billion], Intermediaries account for 37% of respondents and 58% of HF AUM [89 investors / US$ 702 billion], and Private investors account for 37% of respondents and 12% of HF AUM [89 investors / US$ 143 billion].

The survey included respondents from EMEA (42% of respondents with 30% of HF AUM), Americas (50% of respondents with 63% of HF AUM), and APAC (8% of respondents with 7% of HF AUM). The objective of the report is to better understand sentiment regarding performance and asset allocation plans to hedge funds and other alternative investments.

About BNP Paribas

BNP Paribas is the European Union’s leading bank and key player in international banking. It operates in 65 countries and has nearly 185,000 employees, including more than 145,000 in Europe. The Group has key positions in its three main fields of activity: Commercial, Personal Banking & Services for the Group’s commercial & personal banking and several specialised businesses including BNP Paribas Personal Finance and Arval; Investment & Protection Services for savings, investment and protection solutions; and Corporate & Institutional Banking, focused on corporate and institutional clients. Based on its strong diversified and integrated model, the Group helps all its clients (individuals, community associations, entrepreneurs, SMEs, corporates and institutional clients) to realise their projects through solutions spanning financing, investment, savings and protection insurance. In Europe, BNP Paribas has four domestic markets: Belgium, France, Italy and Luxembourg. The Group is rolling out its integrated commercial & personal banking model across several Mediterranean countries, Turkey, and Eastern Europe. As a key player in international banking, the Group has leading platforms and business lines in Europe, a strong presence in the Americas as well as a solid and fast-growing business in Asia-Pacific. BNP Paribas has implemented a Corporate Social Responsibility approach in all its activities, enabling it to contribute to the construction of a sustainable future, while ensuring the Group’s performance and stability.

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