About half of investors in hedge funds think equities peaked as of the end of last year, according to a new survey out Thursday. As a result, they're turning back to hedge funds to manage the coming volatility.
The largest share of investors in five years plans to increase exposure to hedge funds in 2018, according to the report by data firm Preqin. Almost half are planning to maintain these allocations over the next year, which Preqin said is due to damped sentiment towards stocks.
"Having faced an extended period of low investor confidence and net capital outflows, the hedge fund industry is now experiencing a renaissance among institutions," Amy Bensted, head of hedge fund products at Preqin, said in a statement. "This may be largely due to an expected correction in equity markets."
Forty-five percent of investors believe stock markets are at a peak as of the end of 2017, and 5 percent think they are in a "recessional phase," according to the Preqin report.
The feeling that a long bullish phase is ending has been backed by rising volatility in recent weeks.
The CBOE volatility index, or VIX, hit its highest level since August 2015 as stocks entered correction territory briefly in early February. The market has recovered much of the losses, and the S&P 500 is back in positive territory in 2018, up 1.62 percent year to date.
"In these circumstances, hedge funds provide a valuable opportunity for portfolio diversification and downside risk protection," Bensted said.
In response to the equity environment, the report said 37 percent of investors plan to take a more defensive stance with their portfolios, while only 10 percent plan to position themselves more aggressively. Only 14 percent of investors plan to increase their exposure to equity strategy hedge funds.
It's been a rough few years for hedge funds, but inflows are recovering. A year after funds saw $110 billion of outflows, they were back in positive territory for 2017 with net investor inflows of $44.4 billion. This year, 27 percent of investors plan to increase their allocations, the highest proportion since December 2013.
Investors have also upped their searches for active management. The number of active fund searches surged last quarter and the average size of intended new investments jumped by 40 percent, according to Preqin's data.
And although it's an encouraging trend for hedge funds, the report pointed to competition in the crowded marketplace and underlined that firms still need to "work hard to attract and retain new investor capital."