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Following a turbulent few years since the financial crisis, hedge fund investors are indicating a renewed optimism in the industry, according to the results of the latest survey of the global hedge fund industry by our Capital Solutions team.

Conducted in Nov-Dec 2016, the results show that 48% of investors who participated in the survey plan to make net allocations to hedge funds this year.

This compares favorably to 2015’s poll, when 33% indicated that they wanted to increase their net HF allocations.

1 Excludes Intermediaries
Source: All figures refer to Barclays Strategic Consulting 2016 survey results only

Investor Split by
Planned Allocation Activity1

The hedge fund industry experienced a year of mixed fortunes in 2016. While assets under management reached a new high, the industry also saw net outflows for the first time since the financial crisis. 

However, we now anticipate a return to net inflows in 2017 of around $10 billion, based on our analysis of the survey results. We also forecast that investors will allocate about $300 billion gross across various strategies this year.

Allocations by Channel ($billion)
Redemptions by Channel ($billion)

Note: Excludes consultants to avoid double-counting
Source: Projections are based on Barclays Strategic Consulting 2017 Market Sizing Model, HFR

Most of the new allocations will come from redemptions from other Hedge Funds, rather than fresh inflows (new money) into the industry.  

Against this backdrop, it will be critical for hedge fund managers to differentiate themselves. Success in raising or even just maintaining capital will increasingly depend on a host of investor-focused factors.

The winners will be those managers that can demonstrate that they are genuinely responsive to investor preferences and concerns. Innovative leadership in all areas of the business – product offering, data and analytics, operational efficiency and automation, fees and terms, and transparency - will likely become the standard for the HF managers able to attract inflows.

In terms of manager focus, we also found that approximately 15% of our survey respondents accounted for half of the number of allocation tickets to be written in 2017, and 80% of the value of assets to be allocated.

The empowered investor – it pays to negotiate

As investors grow in sophistication, they are exhibiting greater interest across a range of products and offerings, in addition to the traditional emphasis on manager selection and investment strategy. Furthermore, the lines between active and passive management, and across alternatives products, continue to blur, and investors look to Hedge Funds, for example, to manage longer-lock products or a greater portion their long only investments.  

Furthermore, the survey data suggest that investors have been able to negotiate more aspects of the terms governing the relationship with their hedge fund managers. They are seeing greater engagement form mangers in addressing both ‘traditional’ touch points, such as reduced fees for longer locks or larger tickets, as well as the ‘non-traditional’, such as hurdle rates or limits on pass-though expenses.

Frequency with which Investors Successfully
Negotiated Various Terms (over previous 24 months)

Source: All figures refer to Barclays Strategic Consulting 2016 survey results only

Approximately 75% of investors who participated in our survey have successfully negotiated preferential terms, a sign of just how willing managers are to find solutions that meet their clients’ needs.

However, while the survey indicates that investors have been paying lower fees on their more recent allocations, the picture varies significantly depending on the strategy, investor type and allocation sizes.

As expected, larger investors with higher than average amounts to allocate are in a better position to bargain on fees.

Contact the Capital Solutions team

If you are interested in the full survey results (available to clients of Barclays Investment Bank), or if you would like to learn more about our Capital Solutions services and reports, please contact strategicconsulting@barclays.com  

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