Family office interest in hedge funds has not dampened despite managers delivering less than stellar returns in 2012, a survey by J.P. Morgan’s Capital Introductions Group (CIG) has revealed.
Thirty-four per-cent of family offices said they would increase their exposure to hedge funds in 2013, compared with 27% in 2012. Sixty per-cent planned to maintain their current exposures, while just 5% intend to scale down their hedge fund investments, compared with 14% in 2012.
This is despite the average hedge fund posting somewhat lacklustre gains of almost 5% in 2012, according to Hedge Fund Research data, although this is a significant improvement on 2011’s decline of 5%.
The survey said family offices tend to prefer smaller managers with 86% confirming they would invest in a hedge fund running less than $100 million in AuM. Just 10% of family offices require managers to have a minimum AuM of $500 million. A study by PerTrac showed these smaller managers have consistently outperformed their larger counterparts in 13 out of the last 16 years.
Thirty-seven per-cent of family offices confirmed they would increase the number of start-up hedge funds in their portfolios, while 54% said they would maintain their existing exposures. Just 10% said they would reduce their investments into start-ups. Nonetheless, the majority (65%) of family offices still require a minimum track record before allocating.
Three quarters of family office respondents also told J.P. Morgan that they expected a fee discount, often in the form of a founders’ share class, in exchange for investing in a new manager. Hedge fund fees overall – the traditional 2% management fee and 20% performance fee – have faced downward pressure since the financial crisis. A survey earlier this year, also by J.P. Morgan revealed 70% of investors expected fees to decline in 2013, compared with 47% in 2012.
In terms of strategy, 89% of family offices told J.P. Morgan they are most interested in long/short equity amid a rebound in the strategy, which has posted gains of more than 5% year-to-date. The 2013 Deutsche Bank prime brokerage study concurred with 53% of institutional investors predicting long/short equity would be the best performing strategy. Despite macro hedge funds losing 1.19% in 2012, 76% of family offices remain interested in the strategy.
The partial recovery of funds of funds has not translated into family office investments with only 10% considering an allocation into the troubled asset class, added the J.P. Morgan study. The majority of family offices, resentful of the additional level of fees and underperformance, are instead opting to go directly to single managers.
Nonetheless, funds of funds’ decline has been overstated, according to some, with the asset class reinventing its business model, curbing fees, strengthening operational due diligence and creating managed accounts.
The Deutsche Bank prime brokerage study revealed 58% of end allocators said funds of funds’ raison d’être was to provide them with access to niche managers or smaller funds. A survey by SEI in 2012 said 84% of investors believed funds of funds would exist in 20 years time while 72% acknowledged these businesses still provided a valuable role in institutional investment portfolios.
J.P. Morgan spoke to 93 family offices with $50.7 billion in AuM invested in hedge funds. Source