Congestion is the biggest concern for hedge fund allocators, according to a new study from Bank of America. But the study also found that allocators’ own managers’ portfolios were more concentrated. Multi-manager funds have grown significantly but remain popular, albeit costly and facing pressure from LPs.
Thank you for registering!
Access your favorite topics in a personalized feed on the go. Download the app
By clicking “Sign Up”, you agree to our Terms of Service and Privacy Policy. You can opt-out at any time by visiting our settings page or by clicking “unsubscribe” at the bottom of the email.
Allocators are increasingly concerned about crowding into hedge funds. But a new Bank of America survey of allocators shows that these investors are increasingly concentrating their portfolios in the same few large companies.
The survey of 160 allocators with about $680 billion invested in about 4,300 hedge funds around the world found that even though investors quibble about costs, the industry’s largest hedge funds It turns out managers are still cannibalizing assets and market share.
“Respondents are generally moving towards fund consolidation rather than diversification within their HF portfolios,” the report says.
“Anecdotally, we are hearing that ‘1 in, 2 out’ (i.e. 1 new allocation for 2 full redemptions) is the new normal.”
As a result, the largest ones become even larger.
The $4.3 trillion industry saw net inflows of just $7 billion in the first half of 2024, led by multi-strategy hedge funds such as Millennium and Citadel. This type of hedge fund brought in net flows of $10 billion in the first six months of 2024, and the average multi-manager firm has $1.7 billion under management.
Related articles
By comparison, the average hedge fund manages $528 million overall.
Yet, paradoxically, allocators are becoming more concerned about crowding risk in hedge fund portfolios. According to Bank of America, half of respondents said “crowding” will be their top concern as the year ends.
One of the selling points of multi-manager funds is their broad reach across different markets, regions, and asset classes, but these funds have long been known to act in unison in volatile markets, or to has proven that he follows hot fields that he finds.
For example, during the pandemic-induced market surge in early 2020, many of these companies lost money on basis trading, a type of relative value bet that seeks to take advantage of price differences between similar securities. In the years since then, this concentration of trading and the leverage these managers use to generate profits have attracted the attention of regulators.
LPs are finally regaining some influence over these multi-manager funds, but some have struggled to outperform risk-free rates since interest rates rose. Bank of America notes that fee hurdles are becoming more common in a “buyer’s market,” with 42% of respondents saying at least one fund in their portfolio has some sort of hurdle in place. It is said that there are.
The study notes that “asset sourcing remains difficult for most business owners,” which should lead to “stronger collaboration between business owners and allocators.”
