New York (HedgeCo.net) – Despite fears over the European debt crisis, many investors ramped up their hedge fund allocations during the second quarter, according to the Brighton House Associates Q2 2011 Research Report.
Wealth advisors were among those who increased their commitments. The number of mandates BHA collected from wealth advisors this quarter rose by nearly 4% when compared with the results from the first quarter.
Investors seemed to also gravitate towards funds that were focused on the U.S., perhaps in light of fears over European debt. During the second quarter, the number of mandates gathered by BHA analysts for U.S.-focused funds increased by 8.1% over the first quarter.
The secondaries market presented investors with additional opportunities. Hedge fund side pockets were being offered at deep discounts in the second quarter, with the average hedge fund stake selling for only a fraction of its net asset value.
BHA analysts saw a decrease in the number of fund of hedge funds mandates, but identified an increasingly popular trend. More investors are seeking out fund of funds firms to design custom-made hedge fund portfolios that address their specific needs. A number of industry leaders seem poised to take advantage of this new trend.
The second quarter of 2011 was characterized by tumultuous global markets and uncertainty regarding the financial well-being of a number of euro-zone countries as well as the U.S. Still, investors remained interested in hedge funds and allocated $30 billion to the asset class during the quarter, a small decline from the $32 billion allocated in the first quarter.1 Despite lackluster returns and markets that proved challenging for hedge fund managers, funds saw strong investment inflows.
Many investors who had been sitting on the sidelines became more active in the hedge fund space. In a conversation with BHA analysts, a wealth advisor investing on behalf of a large U.S. insurance firm noted that for the past three years, the firm had not been allocating to the hedge fund space. In the second quarter, however, the firm met with new managers, and it anticipates adding three or four global macro and CTA managers, as well as two new long/short equity funds, to its portfolio by the end of the year.
Other investors increased their single-manager hedge fund exposure at the expense of their fund of hedge funds allocations. An insurance firm in Bermuda, which has traditionally invested in funds of hedge funds, confirmed that it is planning on investing solely in single-manager funds going forward. In fact, the firm plans on increasing its hedge fund allocation from its current $350 million to $800 million over the next two years. Still other investors were increasing their hedge fund exposure by employing firms to create customized funds of funds on their behalf, essentially designing tailor-made hedge fund portfolios.
In the private equity space, investors were increasingly interested in sector-focused funds. While interest in funds with diversified sector exposure fell, investor demand grew for funds with exposure to the energy, technology, and clean-technology sectors. Compared with the first quarter of 2011, demand for these funds grew by 53.6%, 33.1%, and 36.4% respectively.
Finally, analysts noted rising interest in real-asset funds as well as funds designed to hedge against inflation. In the second quarter, demand for commodities, timber, natural resources, and other such funds increased by more than 50% over the first quarter. This jump was driven by investors’ desire for funds with a low or even negative correlation to equity and bond markets that could offer the potential for enhanced returns.