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Don't call it a comeback
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Following a tough 2018, which resulted in hedge fund (HF) industry assets under management (AUM) declining for the first time in ten years, the HF industry has bounced back from the declines of 4Q 2018 both in terms of flows and performance. While overall outflows continued in the first half of 2019, the pace decreased significantly and overall performance was strong enough to see expansion once again, according to a recent study of the global hedge fund industry by Barclays’ Capital Solutions team.

Looking beyond overall performance, the first half of 2019 saw a divergence in results by strategy. In the first half of the year, investors continued to pull assets out of Equity Long / Short strategies, while Merger Arbitrage strategies once again received inflows. Multi-Strategy had a reversal from 2018 and saw inflows, while Equity Market Neutral / Quant strategies experienced their first outflows since 2012.

Hedge Fund Industry Assets, Returns and Flows
Hedge Fund Industry Assets, Returns, and Flows

Source: HFR, Strategic Consulting analysis 

*As of 2Q19

Progress report: so far, so good

To conduct the latest hedge fund outlook study, our Capital Solutions team received input from approximately 170 investors representing $370 billion in AUM regarding their asset allocations and strategy preferences in the first half of 2019, as well as their outlook for the next 6 months.

In terms of returns, all strategies posted positive performance YTD in 2019, though strategies with higher market exposure – or beta – saw better performance. Equity Long / Short delivered the highest returns of any strategy YTD in 2019 (+9.5%), buoyed by a rallying equity market. Conversely, Equity Market Neutral strategies, which aim to be beta neutral – or remove market factors from their performance – had the lowest returns at +1.1%.

Hedge Fund Performance by Strategy
Hedge fund performance by strategy

Source: HFR, Strategic Consulting analysis 

*As of 2Q19

Open to alternatives

Looking to the second half of 2019, the survey results suggest that investors remain interested in allocating assets to hedge funds and other alternatives, including private equity and venture capital.

The results represent a shift from late last year, when investor sentiment about hedge funds was only marginally positive. Midway through 2019, 32% of all investors in the sample indicated an increased interest in allocating assets to hedge funds.

Private equity and venture capital may also be well positioned, as 46% of respondents said they may move money towards that direction. Other key areas of investor interest include private credit and real estate / infrastructure.

Overall Asset Allocation Intentions for 2H19
% of Investors Indicating Increases / Decreases in 2H19 - No Intermediaries
Overall Asset Allocation Intentions for 2H19

Source: All figures refer to Barclays Strategic Consulting survey results only. Note: numbers exclude Intermediaries (Consultants and FoHFs).

On the other side of the equation, investors also seem to be losing enthusiasm for Long-only Passive Equity – the only asset class with negative net interest going into the second half of 2019.

When it comes to the question of cash, investors seem eager to put it to work – net interest in cash declined to 1% at the mid-year from 17% in the first half of 2019. This suggests that investors are looking to deploy their cash reserves in search of yield.

New launches for a changing future

Finally, roughly a third of investors indicated plans to allocate to new strategy launches in the second half of 2019. Of the investors sampled, close to 60% of Funds of Hedge Funds (FoHF) planned to make at least one allocation to a new launch. However, only 28% of pensions, sovereign wealth funds and insurance companies were planning to allocate to new launches.

% of Investors Planning to Allocate to New Launches
2H19 Plans for New Launches

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

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Contact the Capital Solutions team

If you are interested in reading Don’t Call it a comeback: 2H 2019 global hedge fund industry outlook and trends study, which is available to clients of Barclays Investment Bank, or if you would like to learn more about Capital Solutions’ services and reports, please contact strategicconsulting@barclays.com.

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