The global hedge fund industry will bounce back this year and might even manage to post net positive inflows, analysts at Barclays suggest.
The bank’s prime services unit sent out a cautiously optimistic research note this week after polling 350 investors at the end of 2016.
Nearly half (48%) plan to increase their hedge fund allocations in 2017 compared to 33% twelve months ago.
The findings come after the sector experienced $70bn worth of redemptions last year - the first annual net outflow since the financial crisis.
“Prominent institutional investors had announced their plans to exit hedge funds entirely and the financial press was awash with articles criticising hedge fund performance and fees,” wrote Louis Molinari, managing director, global head of capital solutions at Barclays, reflecting on last year.
"In fact, we ultimately underestimated the severity of the impact, as 2016 saw $70bn in net redemptions from hedge funds, marking the fifth consecutive quarter of outflows."
Looking ahead, Molinari is more optimistic and expects a return to net inflows for the industry in 2017, estimated to be around $10bn in the aggregate.
"There may initially be further outflows before investors begin to allocate more than they redeem, but we do believe that the outflows will eventually begin to taper," he added.
At a macro level, investors are anticipating US-led re-flation and fiscal expansion replacing monetary policy as a driver of economic growth.
At the same time, Japan and the Eurozone appear to be staying the course with very accommodative monetary policies.
“Relative to recent times, we expect higher dispersion, lower correlation and higher volatility this year, which should be positive news for hedge fund managers,” Molinari explained.
He also reckons that the noise around hedge fund performance has actually been more dire than the reality.
“Our analysis suggests that hedge fund performance on a risk-adjusted basis – and net of risk-free rates – has not deteriorated nearly as much as some commentary would suggest.
“In fact, hedge funds have displayed surprising resilience over the course of the most recent industry drawdown. This is reflected in our expectation for a return to positive net inflows in 2017.”
Meanwhile those investors who plan to cut hedge fund allocations demonstrate three principal trends in their reallocation decisions, according to Barclays.
The first is an increased appetite for more illiquid alternatives, such as private equity and venture capital.
Secondly, there is appetite for increased long-only exposure (across both active and passive equities and fixed income).
Lastly, there is continued appetite for risk premia products which are viewed as a bridge between the passive and active investment landscapes.
Even so, Molinari says hedge funds will continue to serve important investor objectives (uncorrelated returns, volatility mitigation, downside protection).
“2017 will certainly be a pivotal year for the hedge fund industry, and success will be likely for those who leverage the ‘turning of the tide’ and convert the recent challenges into ongoing partnerships and opportunities," he added.
"There remains a lack of a clear consensus in terms of favored strategies for the year ahead. Managers will need to exhibit focus and compete to demonstrate true responsiveness to investor concerns around fees and terms, product offering and transparency."