Hedge fund investor appetite wanes for high fees and private credit, says Goldman Sachs

Reuters

Published Aug 02, 2024 10:37AM ET

Updated Aug 03, 2024 09:25AM ET

Hedge fund investor appetite wanes for high fees and private credit, says Goldman Sachs

By Nell Mackenzie

LONDON (Reuters) - (This Aug. 2 story has been corrected to read 'wanes for,' not 'hit by,' in the headline and to clarify that the 15% refers to those willing to increase their exposure to multi-manager strategies in paragraph 2)

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Global investor appetite for the most expensive multi-strategy hedge funds has fallen, Goldman Sachs said in a report to clients seen by Reuters on Friday, though more investors plan to add hedge funds to their portfolios.

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Goldman Sachs' data from a survey of more than 300 investors like family offices, sovereign wealth funds and pension schemes showed that just 15% expressed an interest in increasing their exposure to multi-manager strategies with so-called pass-through fees, where the hedge fund passes on its costs.

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The figure has declined from just over a fifth of investors willing to take on the extra fees this time last year, said Goldman Sachs.

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The biggest multi-manager hedge funds charging pass-through fees now take more than half of gains back, leaving investors with an average 42% return on investment, after expenses and performance fees were deducted, said an earlier report by Barclays.

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"If pass-through fees make the meal smaller, as an investor you have to decide if the meal is still big enough or of such high quality that you can live with a much smaller meal. It's when you have a small, not so great meal that your cook has a problem!" said Harald Berlinicke, partner at Sarnia Asset Management.

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These hedge funds saw their highest proportion of outflows totalling 1.5% of assets managed in the first half of the year, with net outflows overall about 1.1% of assets managed across all strategies, except systematic investing strategies, which saw net inflows.

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"The flows picture has remained challenging thus far in 2024," Goldman's report said.

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Goldman said endowments and foundations may have withdrawn funds to pay for other parts of a portfolio tied up in private markets.

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The survey also showed, however, that the highest proportion of investors since 2020 planned to add more hedge funds to their portfolios.

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Hedge funds beat private credit for the first time as the most popular asset class overall. The much-hyped strategy where companies borrow directly from specialised funds, bypassing banks and the bond market, saw the proportion of investors looking to cut their exposure almost double to 11% from 6% in 2023, the bank said.

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Most investors willing to increase spending on alternative investments that Goldman surveyed generally did not change their minds from a similar survey the bank ran in 2023 except for a huge drop in interest funds that take long only positions in bonds.

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Customer optimism for hedge funds has rebounded to the highest level since 2020, with over 85% of investors telling Goldman that performance of their hedge fund portfolios exceeded or met expectations for this year, up from 67% in 2023.

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"Given this year’s decent returns, the multi-strat space is a long way from any sort of crisis," said Jon Caplis, chief executive of hedge fund research firm PivotalPath.

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Multi-strategy hedge funds tracked by PivotalPath have returned more than 6% through June.

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"However, we are seeing an increasing dispersion between the better performing multi-strats and some of the pretenders to the throne who have ambition, but also struggle for scale and talent," said Caplis.

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