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The 2010s might’ve appeared to be a challenging decade for the hedge fund industry, however a survey by our Strategic Consulting team suggests that momentum is building in 2020—potentially setting the scene for a new era of opportunity for investors.

Over the last decade, the global hedge fund industry initially saw inflows as investors put money back to work following the global financial crisis. However, three out of the last four years saw overall outflows totaling about $140 billion. Meanwhile, a massive rally for long-only assets has made generating alpha difficult for hedge fund managers. In absolute terms, performance in the 2010s significantly lagged that of the 2000s.

Results from the latest Strategic Consulting study shows a significant change in sentiment for 2020, which may lead to potential inflows of $5 to $10 billion. Furthermore, the team projects gross hedge fund allocations to total about $400 billion, which means that while net flows may be marginal, hedge fund managers will still have a lot to play for. The study analyzes how the overall macroeconomic environment has changed and how investors are positioning themselves for the year ahead.

1. 2019 marked a turning point for the hedge fund industry

Following weak performance in 2018––in which the industry saw a decline in overall assets under management (AUM) for the first time in a decade––hedge funds bounced back in 2019.

It wasn’t simply a matter of hedge funds piggybacking on the S&P 500’s 30% return in 2019. On the contrary, every hedge fund strategy delivered positive returns last year, and all but one strategy recouped 2018’s losses to surpass prior drawdowns. In 2019, the hedge fund industry grew its AUM to an all-time high of $3.32 trillion.

AUM and Performance by Strategy
AUM and Performance by Strategy

Source: HFR, Barclays Strategic Consulting Analysis. Note: Total Return is computed by asset-weighting HFR’s indices for their main HF categories (Equity, Macro, RV, ED)

2. The macroeconomic environment has changed–and so have expectations

The last decade has been an interesting backdrop for the hedge fund industry. Investors have benefited from a long-running bull market, while also having to contend with historically low interest rates and periods of extreme volatility.

Those factors have helped contribute to hedge funds’ relative under-performance over the last decade on an absolute basis. However, a deeper look suggests it may not have been as dismal as the headline numbers suggest. Hedge funds returned an annualized 4.2% between 2010 and 2019 versus 6.8% in the 2000s, but that comparison doesn’t account for significant differences in risk-free rates. It turns out that hedge funds returned the LIBOR rate +3.5% in both decades. Moreover, hedge funds also generated better risk-adjusted returns (i.e., higher Sharpe ratio) between 2010 and 2019 than they did in the previous decade.

Hedge Fund Performance
Hedge Fund Performance

1. Annualized HF returns minus annualized 3-month LIBOR
Source: HFR, Bloomberg, Strategic Consulting Analysis

Heading into 2020, all investor types indicated that they intend to increase their allocations to hedge funds. This represents a big shift in investor sentiment, which has gone from marginally net positive – with more investors planning to increase than decrease allocations in 2019 – to 25% net positive in 2020.

Number of Investors Indicating Plans to Increase / Decrease in 2020 (%)
Number of Investors Indicating Plans to Increase / Decrease in 2020 (%)

Source: All figures refer to Barclays Strategic Consulting survey results only. Excludes Intermediaries, Note: “LAO” indicate Large Asset Owners

3. New trends prompt hedge fund managers to rethink their positioning to meet investor demand

Although net inflows into the hedge fund industry in 2020 may be modest, the study suggests that there will be opportunities for hedge funds to attract new money as investors rotate ~$400 billion among strategies and managers.

Investor interest in hedge fund strategies has shifted a bit from 2019. For instance, Multi-Strategy and Quant Equity hedge funds are once again among the most favorable. Another strategy that has seen a dramatic change in sentiment is Generalist Equity, which may be low relative to the other Equity hedge fund strategies, including Sector Specific, Market Neutral, and the aforementioned Quant Equity, but up from previous years.

On the basis of net interest, sentiment has improved significantly year-over-year –– thanks largely to a bump in bullish sentiment from family offices. This is an area that could see significant turnover, with ~35% of investors indicating that they plan to make changes to their Equity hedge fund manager mix.

Gross Allocations by Investor Type ($bn)
Gross Allocations by Investor Type ($bn)

Source: All figures refer to Barclays Strategic Consulting survey results only. Projections are based on Barclays Strategic Consulting 2020 Market Sizing Model, HFR; Note: Excludes consultants to avoid double-counting.

Notably, ESG––environment, social and governance––investing has become a hot topic across asset management, and the hedge fund industry is no exception. In adjusting strategies to meet demand, hedge funds are incorporating ESG criteria as factors into their investment processes to varying extents.

Among investors surveyed, almost half indicated that they prefer hedge funds that have ESG factors as an input into their investment process when they make an allocation.

ESG Elements that Contribute to Allocation Decisions
ESG Elements that Contribute to Allocation Decisions

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

Looking ahead, investors' expectations for returns over the next year suggests that they are optimistic about the hedge funds industry. Only time will tell what the 2020s will bring, but the signals so far indicate that the new decade is off to an auspicious start.

Important content disclosuresImportant content disclosures

Contact the Strategic Consulting team

If you are interested in reading the full 2020 Hedge Fund Outlook study, which is available to clients of Barclays Investment Bank, or if you would like to learn more about Strategic Consulting services and reports, please contact strategicconsulting@barclays.com.

Learn more about our Strategic Consulting offeringLearn more about our Strategic Consulting offering

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