Hedge Funds Shone In 2020, Family Offices Eye Higher Allocations

The hedge fund industry completed a robust recovery in 2020, demonstrating resilience after years of investor skepticism and redemptions. According to a joint study by HFM and the Alternative Investment Management Association (AIMA) published in January 2021, over 90% of investors expressed satisfaction with hedge fund performance in 2020, marking a substantial reversal of sentiment. The research surveyed 65 institutional investors with combined assets under management of $3.8 trillion, of which $156 billion was already allocated to hedge funds, alongside senior investment and marketing professionals from 135 hedge fund managers.

The approval rating translated directly into capital commitments. Forty-five percent of surveyed investors indicated plans to increase their hedge fund allocations during the first half of 2021, with more than half maintaining existing commitments to other alternative investments. The primary driver for increased allocations was the expectation of even stronger forward returns, cited by 64% of investors. Equity valuation concerns ranked second at 39%, reflecting broader market apprehension about stretched equity multiples entering 2021. Notably, 32% of investors identified hedge funds as a potential long-term substitute for fixed income, a significant consideration given the persistently low interest rate environment that had eroded traditional bond returns.

Strategy selection reflected shifting preferences among allocators. Quantitative and systematic hedge fund strategies emerged as the most likely candidates for increased capital in H1 2021, with 31% of investors considering new or expanded allocations to quant strategies. Arbitrage and relative value strategies followed closely at 29% of investor interest, while global macro strategies attracted consideration from 25% of respondents. This shift toward systematic and diversified approaches suggested a maturing institutional appetite for hedge funds capable of delivering returns independent of broad market direction.

Parallel trends in family office capital allocation reinforced the hedge fund sector's strengthened position within institutional portfolios. Data from Preqin showed that family offices with allocations to private markets surged 524% since 2016, expanding from 651 to 4,067 entities. Family offices were simultaneously increasing exposure to venture capital and private equity, broadening their alternative investment footprint beyond traditional hedge fund allocations. This expansion of permanent capital from family offices and institutional investors signaled sustained structural demand for alternative investment strategies heading into 2021.