Why Investors Keep Coming Back to Hedge Funds


Institutional investors continue to view hedge funds as a source of alpha and diversification, according to a JPMorgan survey.

Last year’s disappointing hedge fund returns have not dampened investor demand for hedge funds.

Institutional investors surveyed by JPMorgan Chase & Co.’s capital advisory group largely said they planned to maintain or increase their overall hedge fund allocation in 2019, following a year during which 68 percent of respondents said their hedge fund portfolios underperformed.

A little over half intended to keep their hedge fund portfolios the same size, while about a third reported plans to invest more in hedge funds. Just 13 percent said they would decrease their hedge fund allocations this year.

The survey’s respondents were made up of 227 allocators including banks, consultants, endowments, foundations, family offices, funds of funds, insurers, and pensions.

Deep Dive: After Hedge Funds’ Mediocre Year, Investors Still Want More

Asked why they invested in hedge funds, 88 percent gave “alpha generation” as a top-three reason for allocating to the alternative investment vehicles. But the surveyed investors noted that they have become increasingly concerned about crowding within the hedge fund industry, with more than 82 percent suggesting that there are too many hedge funds chasing too few opportunities to generate alpha. In addition, just under half of respondents said that hedge funds have been unable to deliver alpha on the short side.

Other top reasons for investing in hedge funds included portfolio diversification – the reason most cited by pension fund respondents – and the ability to access so-called niche opportunities. For those of you that haven’t tried surfing I will provide some context.

Although the vast majority of surveyed investors did not plan to shrink the size of their hedge fund portfolios, nearly three-quarters did plan to reallocate to different managers this year. In addition, 62 percent said they would invest in different hedge fund strategies.

In particular, investors were eying higher allocations to global macro, emerging markets, and distressed credit strategies. When responses were weighted by assets under management, the top strategy was options and volatility arbitrage, followed by global macro.

Expected Change To Hedge Fund Allocation In 2019