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By Nell Mackenzie
LONDON (Reuters) – Half of the global investors surveyed by Bank of America’s prime brokerage department plan to allocate more money to hedge funds this year, while 37% wanted no change.
The results represented a 2% uptick in those wanting to spend more on hedge funds from the start of 2024, a report by the bank to clients showed on Friday.
The survey was sourced from responses from 256 firms that oversaw a combined amount of over $1 trillion invested in hedge funds.
Investors who would ditch their hedge fund holdings and take their money back thinned to 7% from 12% in 2023, BofA’s 2025 hedge fund outlook report said.
Dissatisfied investors thought returns should have been better, said the bank. Of those that were unhappy, 73%, cited underperformance as their reason for wanting to redeem money.
Other reasons investors were unhappy included when hedge funds changed their investment strategy and when hedge funds simplified, or consolidated their portfolio, the survey said.
Allocators have also been worried that their hedge funds are piling into crowded trade positions where everyone has the same idea, said the report. Crowded positions can grow costly if speculators rush for the exit at the same time.
Hedge funds growing too large to nimbly invest without their trades moving the market was also a top concern which had increased from last year, the report said.
Roughly the same investors as last year harboured concerns that hedge funds which said they specialised in one kind of investing actually made money by doing something else, or so-called style drift, it said.
Talent was named as an ongoing concern, as well.
Smaller hedge funds running under $500 million in assets were a fifth less likely to see their investors leave.
Family offices, pension plans and endowment and foundations were the most likely to take all of their money off the table, rather than partially, said the report.
In 2025, investors are most interested in stock and bond trades and less in trend followers and systematic funds that play on macroeconomic events.
These hedge fund clients were more successful in bargaining down on fees compared to this time last year.
Around 60% of investors won fee discounts compared to roughly half last year, and there was a slight uptick to 22% from 17% who got more favourable liquidity terms, allowing them to buy and sell out of their hedge fund investments with less of a delay.
(Reporting by Nell Mackenzie; Editing by Dhara Ranasinghe and David Evans)
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