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Mark Yusko, founder of fund of hedge funds Morgan Creek Capital Management, said that recent flows into hedge funds are partially the result of stock-market gains—swelling portfolios have to be reset with more money added to asset classes outside of equities.
"Simple rebalancing requires that more money go into hedge funds," Yusko said.
He also said that institutions were willing to trade lower returns with hedge funds in order to have a better chance to achieve the minimum performance necessary to meet long term needs (usually returns of around 7.5 percent a year).
"They would rather have strategies that achieve those returns with a high probability, even if they give up the upside," Yusko said.
Investor demand for specific hedge fund strategies closely follows recent winners and losers.
The hottest strategy, with 56 percent of investors surveyed by Credit Suisse increasing their allocation net of those decreasing it, was event driven. The term refers to funds that bet on corporate events, such as restructurings or management changes, than can boost value.
The Absolute Return Event Driven Index, which tracks such funds, is up 5.56 percent in 2014, compared with a return of 4.21 percent across all strategies. Examples of specific fund first half performance include $14.7 billion Pershing Square Capital Management's International fund (up 25.35 percent); $15 billion Third Point's Offshore fund (up 6 percent); and $24.4 billion York Capital Management's Investment fund (up 11.7 percent).
Another strategy in great demand were hedge funds that focus on investing in stocks, so-called "long/short equity" vehicles. Credit Suisse said that a net of 41 percent of institutional investors planned to add these vehicles to their allocation. That's as the Absolute Return U.S.Equity Index is up 4.34 percent, better than the average hedge fund but worse than a 6.05 percent return for the S&P 500 Index.
Examples of large equity-focused hedge fund performance in the first half includes $9 billion Maverick Capital Management's Maverick Fund (up 1.13 percent through June 27); $9 billion Glenview Capital Management's Capital Partners fund (up 9.58 percent); and $3.9 billion Passport Capital's Long/Short Strategy Fund (down 0.2 percent).
Musko said hedge funds get a bad rap because they are often compared to benchmarks like the S&P 500. He added that equity-focused hedge funds are not trying to beat stock indexes in the short term, but rather they are trying to provide decent returns with lower volatility.
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