Are we heading into a "new dawn" for hedge funds?

Hedge funds performed well in 2020, showing resilience despite the uncertainty of the pandemic. But what’s ahead for 2021?

According to a new report from Credit Suisse, the industry is poised for further success as institutional investors look to plug the return gap and enhance their 60/40 model.

In the study, titled “A New Dawn”, global institutional investors with a total $800 billion in hedge fund investments provide insights into their strategy preferences and allocation intentions.

Using hedge funds to make changes to their portfolios in the current low bond yield environment is favoured by 70% of respondents. Enhancing the traditional 60/40 model will also include investments in high-yield credit, equities, and private credit.

"The current rate environment is creating a sense of urgency for investors to identify new sources of returns for their fixed income portfolio,” commented John Dabbs, global co-head of Prime Services and Co-Head of Americas Equities. “Our survey highlighted that investors are looking to hedge funds in addition to other asset classes in meeting their long-term obligations."

Private market access

Hedge funds are used to access private markets by more than half of respondents, including family offices and endowments & foundations. This interest in private markets is driven by strong supply of pre-IPO companies and PIPE transactions, access, knowledge, and return potential.

"We've seen an uptick in demand from LPs to access private markets through hedge funds, given a manager's ability to apply the breadth of their public markets investing acumen to private opportunities,” said Joseph Gasparro, head of content for Credit Suisse Capital Services Americas. “Privates also allow managers to engage with next-generation companies that could be disruptive to publicly-traded peers."

Non-trades increase but equities remain strong

A majority (61%) of allocations over the past 12-18 months were directed to non-traditional structures, mainly custom offerings (co-investments and managed accounts), driven by investors' desire to tailor fit specific investment objectives. This is expected to rise in the year ahead.

Equities remain key though with 7 out of the top 10 overall strategies equity-oriented. Favoured sectors are healthcare, fundamental, emerging markets, and TMT. APAC was the most in-demand region and China the most preferred country.

"Investors indicated continued strong interest in equity-oriented strategies, particularly around sector and regional specialists,” said Jaynita Sodhi, head of Credit Suisse Capital Services Americas. “We also noticed a large sentiment upswing for discretionary macro and multi-strategy managers. Hedge fund dispersion for firms employing these strategies widened considerably in 2020, highlighting the importance of manager selection in driving portfolio returns."