What’s going on here?
Goldman Sachs’ new report reveals a noticeable dip in interest for high-fee multi-strategy hedge funds, with only 15% of surveyed investors considering increasing their exposure.
What does this mean?
Investor enthusiasm for costly hedge funds has waned, as demonstrated by Goldman Sachs’ survey of over 300 family offices, sovereign wealth funds, and pension schemes. Interest in these funds has dropped from over 20% last year to just 15%, driven by underwhelming post-fee returns. With multi-strategy hedge funds providing an average net return of only 42%, more than half of the gains are often depleted by expenses and performance fees. As a result, investors are reconsidering whether the net returns justify the inflated costs. This shift in sentiment led to a 1.5% asset outflow in the first half of 2024, the largest so far, although other hedge fund strategies saw net inflows.
Why should I care?
For markets: The shifting landscape of investment preferences.
Hedge funds have now surpassed private credit as the most favored asset class. While hedge funds experienced decreased interest in high-fee strategies, investor sentiment overall has rebounded, reaching its highest level since 2020. Interestingly, despite the outflows, more investors are looking to hedge funds to meet or exceed their portfolio expectations, up from 67% last year to over 85% in 2024. Increased disparity among multi-strategy hedge funds’ performance could influence future market dynamics.
The bigger picture: Evaluating value amidst changing returns.
The report underscores a critical scrutiny of whether hedge funds’ net returns warrant their hefty fees. A Sarnia Asset Management partner likens it to assessing the quality and size of a ‘meal’ left after fees. Some endowments and foundations are reallocating away from hedge funds towards private markets. This broader trend could indicate a pivot in global investment strategies as institutions seek more cost-effective and high-yielding alternatives. As hedge fund interest surges to a four-year high, understanding these shifts can reveal much about future investor behavior and economic adaptability.
