Measuring Hedge Fund Performance: Investors Weigh In

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Institutional investors partner with hedge funds to achieve specific, unique goals within their investment portfolios.

According to the Preqin data, key objectives most frequently cited by investors include:

-Returns that are uncorrelated to equity markets (ie. S&P 500)
-Absolute returns in all markets
-Dampening portfolio volatility and diversifying total portfolio

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Measuring Hedge Fund Performance: Investors Weigh In

  1. 1. Measuring Hedge Fund Performance: Investors Weigh In Managed Funds Association | June 2014
  2. 2. Institutional Investors 2 Institutional investors – including corporate and public pension plans, university endowments and charitable foundations – account for 65%* of the hedge fund industry’s assets under management 1 *Preqin Special Report: The Real Value of Hedge Fund Investment, June, 2014.
  3. 3. 2 Key Objectives Institutional Investors Look to Achieve From Their Hedge Fund Portfolio Investments 3 *Preqin Special Report: The Real Value of Hedge Fund Investment, June, 2014. Institutional investors partner with hedge funds to achieve specific, unique goals within their investment portfolios. According to the Preqin data, key objectives most frequently cited by investors include: • Returns that are uncorrelated to equity markets (ie. S&P 500) • Absolute returns in all markets • Dampening portfolio volatility and diversifying total portfolio.
  4. 4. 3 What returns do investors seek? 4 *Preqin Special Report: The Real Value of Hedge Fund Investment, June, 2014. Preqin found that “producing high returns, a perception many outside of the industry believe is the domain of the hedge fund, is a priority for just a small proportion (7%) of the investors that participated in Preqin’s survey.” As shown in the chart above, the absolute returns sought by investors from hedge funds are relatively modest. Two-thirds (67%) of investors indicated they seek annual returns between 4% and 6% from their hedge fund portfolios.
  5. 5. How do investors measure hedge fund performance? 5 Observers outside the industry frequently compare hedge fund performance to broader, unrelated measurements like the performance of the S&P 500 index However, due to the variation in strategy and style between funds, as well as the individual objectives they are used to achieve, many investors view these broader comparisons as irrelevant, developing separate, more accurate measurements to determine if hedge funds are meeting their goals. 4 *Preqin Special Report: The Real Value of Hedge Fund Investment, June, 2014. 36% of investors use separate benchmarks to measure separate hedge fund strategies 29% use a single benchmark to measure their entire hedge fund portfolio 24% of investors believe the S&P 500 and other public indices are no longer relevant to hedge fund performance
  6. 6. Do hedge funds make a difference? 6 5 *Preqin Special Report: The Real Value of Hedge Fund Investment, June, 2014. Yes. True to the objectives outlined by the majority of investors, hedge fund allocations help to reduce risk in their overall portfolios. In fact, 80% of investors believe that their portfolio risk would increase if hedge funds were removed from their portfolios.
  7. 7. 6 How do hedge funds size up? 7 *Preqin Special Report: The Real Value of Hedge Fund Investment, June, 2014. How have hedge funds matched up to investors expectations? According to the Preqin data, they’ve done quite well. Eighty four percent of investors queried feel that hedge funds have met or exceeded their returns expectations over the past 12 months.
  8. 8. 7 What does this mean for investments in hedge funds in the future? 8 *Preqin Special Report: The Real Value of Hedge Fund Investment, June, 2014. Preqin found that 19% of respondents have plans to increase their target allocation to hedge funds in the next 12 month, 3-year, and 5-year periods. Just 4% plan to decrease the amount invested in hedge funds, which means that 2014 is likely to be another good year for hedge funds net inflows from institutional investors.

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