BNP Paribas (EPA: BNP), Europe’s global bank, and its Prime Services business published its annual 2024 Alternative Investment Survey.
BNP Paribas’ Capital Introduction Group “surveyed 238 allocators in December 2023 and January 2024, who invest or advise on $1.2 trillion in hedge fund assets.”
This amount represents about one-third of industry assets under management (HF AUM).
Ashley Wilson, Global Head of Prime Services at BNP Paribas, said:
“BNP Paribas credit prime platform is well positioned to support the continued growth of credit strategies as highlighted in our survey this year. We have integrated repo into prime enhancing our borrow and financing solutions which will help our clients execute their strategies and deliver returns to their investors. We are encouraged to see more allocators considering quant multi strategy, as these managers have clearly differentiated themselves in the past three years, however limited capacity in these funds will remain an obstacle for investors akin to that of the larger multi manager platforms.”
Marlin Naidoo, Global Head of Capital Introduction at BNP Paribas, added:
“Allocators are starting to position for an era where alpha and diversification are finally expected to deliver strong returns, as they anticipate a departure from the past decade’s US equities dominance. Whether through asset allocation changes or a portable alpha implementation, this pivot spells opportunity for hedge funds.”
Key findings of BNPP’s Alternative Investment Survey:
Hedge fund performance: 2023 flipped 2022 on its head
In 2023, the market soared with the MSCI World “returning 24% whilst hedge funds returned 7.6%; contrasting 2022 when the market struggled and hedge funds protected capital.”
Equity long/short focused on Americas or TMT “led the way for most of our responding investors as the best performing strategy – precisely what had struggled most the year before.”
Conversely, discretionary macro and CTAs were “the worst performers in respondents’ portfolios, having topped the charts in 2022.”
Over the full 24 month period (2022 and 2023), the average hedge fund “outperformed global equity markets by 5.72%.”
Investors back hedge funds as we shift into the alpha era
For most of the past decade, hedge funds “faced headwinds to generate alpha as a result of zero interest rates and subdued volatility. In 2023, respondents reported that their hedge fund portfolios returned 6.67%, 1.5% shy of their target return.”
Historical analysis shows hedge funds “perform well in periods of high, stable rates, as a result survey respondents have pushed up their return targets by 161bps since 2022 from 7.45% to 9.06%; the highest level it’s been at in more than 10 years as they anticipate moving into a high stable rate environment: the alpha era.”
Perhaps unsurprising given (1) hedge fund underperformance versus their expected returns in prior years, (2) investors taking profits from their hedge funds to rebalance their portfolios following 2022 outperformance versus other investments and (3) five percent risk free rates, last year saw up to US$100 billion of net outflows.
Nevertheless, for the year ahead, almost half of our respondents are looking to contribute to hedge funds, expecting to add $17bn on a net basis in 2024 up 70% from the $10 billion net they added in 2023.
Credit remains the most sought-after strategy
Continuing the trend from our survey last year, credit strategies remain the most sought after in 2024 with 33% of respondents looking to add on a net basis.
As predicated in our 2023 survey, credit was the number one strategy allocators added to last year; however, the Capital Introduction team did not observe allocators investing as many dollars as they planned to. Only 21% of respondents surveyed added to credit in 2023, whereas in our survey last year 48% had intended to do so.
China exodus slowing down in 2024
The world’s second-largest economy “has slowed down in recent years, following the Covid pandemic and the more recent crash in the property market.”
Last year, 42% of investors on a net basis pulled capital “from China-focused hedge fund managers.”
This exodus of capital is expected to “slow down in 2024, with only 6% of investors on a net basis looking to redeem.”
The survey included respondents “from EMEA (42% of respondents with 30% of HF AUM), Americas (50% of respondents with 63% of HF AUM), and APAC (8% of respondents with 7% of HF AUM).”
The objective of the report is “to better understand sentiment regarding performance and asset allocation plans to hedge funds and other alternative investments.”