Monday, July 15, 2024

BNP Paribas sees higher demand as standard fee HFs beat pass-through rivals

Bullish investors are planning to load up on hedge funds in the year ahead, despite fees rising for the first time in more than a decade, according to BNP Paribas.

The French bank’s cap intro survey found healthy sentiment towards the space after the first year since the pandemic that hedge funds with regular fee models outperformed their pass-through rivals.

Credit strategies top LP wish-lists for the next 12 months, a repeat of the last year when it was the most-added to area of the industry. A third of respondents are looking to add on a net basis.

“Heightened interest rates are expected to further expose balance sheet weakness, creating an environment where credit hedge funds can strategically capitalise on short and distressed credit opportunities,” said the bank in a statement.

“Additionally, as technicals tighten spreads while fundamentals simultaneously widen them, credit funds will also be well-positioned to exploit the increasing dispersion between strong and weak companies.” 

That comes off the back of a strong start to the year for the strategy, with fixed income-based relative value arbitrage the top performing sub-strat in January, according to new HFR figures.

The cap intro team found that investors have increased their target return from 7.45% in 2022 to 9.06%, the highest level in a decade, after the spike in rates.

“Investors are anticipating improved returns from their hedge fund portfolios as they expect us to move into a high but more stabilised rate environment: the alpha era.”

That confidence explains why respondents said they would add $17bn on a net basis in the next 12 months, up from $10bn net last year.

A key finding centred on the relationship between fees and performance. After two exceptional years for leading multi-managers charging pass-through, net returns on average were lower in 2023.

Hedge funds with a regular fee model made a higher return than their pass-through rivals for the first time since the pandemic, 7.88% versus 5.98% last year.

The bank added: “Our analysis shows that the investors’ share of return amongst pass through structures dipped below 50% while managers with no pass through fees outperformed.”

Aside from the potential disparity in reward between LPs and the multi-managers they invest with, BNP said investors also have concerns over position crowding and the potential for a systemic deleveraging event hitting the sector.

BNP found that pass-through had contributed to hedge funds rising for the first time in over a decade.

The survey was based on responses from 238 allocators managing or advising on $1.2trn of hedge fund assets, canvassed in December and January.

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Multi-strategy hedge fund power list 2023 (exclusive)
BlueBay adapts key fund and joins multi-strategy club (exclusive)
Multi-strategy funds face ‘talent bubble’ test (analysis)
US multi-strats spearhead Dubai hedge fund moves (exclusive)
Schonfeld’s Millennium move shows cost pressure on multi-strats (analysis)
Man Group signals multi-strat focus under new CEO (exclusive)