A close look at the investor intentions for hedge funds suggests that poor managers will see their allocations reduced this year. The proportion of respondents who will reduce their allocations is at the highest levels reported and about 20% higher than last year and more than double from two years ago. Similarly, the survey has lowest level of respondents willing to increase their allocations.
So where will the allocation declines come from? The allocation plan survey shows that fund of funds and managed futures will see the most respondents with decreases in allocations on an outright basis. Another way to look at the allocations changes is to take the net between allocation increases and decreases. In this case the biggest net declines will be with activist, fund of funds, emerging markets and managed futures. It is notable that there are some strategies that will see both large expected increase and decreases in exposure like macro and equity strategies.
We know that expectations are often backward looking. Poor (stronger) performance last year will lead to lower (higher) allocations this year; however, it may not be the case that this serves as a contra-indicator. There is not enough evidence to say that poor returns for a strategy last year will lead to higher returns this year. What is clear is that while 60% of strategy exposures will be maintained or be “safe”, 40% of allocations may be in play. Managers will have to earn their spot in an investor’s portfolio.