Investors plan to stick with hedge funds as fees fall
Most institutional investors plan to maintain their current level of investment in hedge funds over the next three years, according to a survey conducted by Greenwich Associates for Ernst & Young. Of the 63 investors interviewed, 69% have no plans to change hedge fund allocations, 18% will increase investments and 13% will decrease investments. The average management fee of the 100 hedge fund executives surveyed fell from 1.45% in 2015 to 1.35% in 2016. However, 38% of institutional investor survey respondents said they were dissatisfied with the fees charged, 22% were very satisfied and 40% had no opinion.

A majority of institutional investors — pension funds, endowments, foundations and funds of funds — intend to maintain their current level of investment in hedge funds over the next three years.

Of the 63 investors interviewed, 69% said they do not intend to change their hedge fund allocations, showed the results of a survey conducted by Greenwich Associates for Ernst & Young Global. Of the remainder, 18% said they will increase their hedge fund investments over the next three years and 13% said they will decrease investments.

By region, 70% of executives of North American institutions said they will stick to their current hedge fund allocation, 10% said they will increase and 20% said they intend to reduce the size of their portfolios.

Of European and Asia-Pacific region investors surveyed, 23% plan to pump up their hedge fund investments, just 9% will decrease the size of their portfolios and 68% will stick to the status quo over the next three years, according to the report, “Will adapting to today's evolving demands help you stand out tomorrow: 2016 Global Hedge Fund and Investor Survey.”

In response to a multiple-choice question, investor respondents said over the next three to five years, they intend to:



move assets out of traditional hedge funds and into other alternative asset classes such as private equity and real estate, 48%;



increase hedge fund investment through separate accounts or customized strategies, 42%;



increase the overall alternatives allocation, 28%;



decrease the number of hedge fund managers in their portfolios, 22%; and



manage more money internally and reduce the use of external managers, 18%.

The average management fee of the 100 hedge fund executives surveyed fell to 1.35% in 2016, compared to 1.45% the prior year.

Despite lower management fees in aggregate, in 2016, 38% of institutional investor survey respondents said they were dissatisfied with the expense ratio of the hedge funds they invest in vs. 35% in 2015. Investors who said they were very satisfied with hedge fund fees accounted for 22% of the total universe in 2016 and for 19% in 2015, and those neutral on the issue of hedge fund fees totaled 40% in 2016 and 46% the previous year.

Greenwich Associates conducted telephone interview with asset owners and hedge fund managers between June and September, the report said.