141. Why are allocators increasing their hedge fund exposure?

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1:26Manas Singh: Hi there, this is Tom Keough, host of the Long Short AMA podcast, exploring the ideas and trends shaping the global alternative investment industry. Well, today we're taking a closer look at the latest Hedge Week and AMA Allocator Sentiment Report. Every six months, we ask investors how they're thinking about hedge funds, where they're allocating, what's influencing those decisions, and perhaps most importantly, how their thinking is evolving around hedge funds. Joining me is someone who's been immersed in this research over the past few months. That's Manus Singh, head of research at Hedgeweek and lead author of the report.

2:05Manas Singh: Manus, you're very welcome back to the longshore today and it's great to have you with us.

2:09Tom Kehoe: Thank you so much, Tom. It's brilliant to be back.

2:11Manas Singh: So let's start then with the title of the report, Allocating in a Fragmented World. It's a phrase that we're hearing increasingly, but what does it actually mean to the investors that you spoke with? What's driving this sense that we're entering a more fragmented investment landscape?

2:29Tom Kehoe: Absolutely. I think what is quite interesting to talk about when it comes to fragmentation is that it's a word that keeps coming up in different contexts when you speak to allocators and also hedge fund managers, but largely with allocators. And I think what they tend to explain it with is through their lens, if they're looking at one event or the other event and so many different things that used to move together and that have stopped moving together. I mean, if we look at oil and shipping because of Hormuz, I mean, a fifth of global oil and gas used to and is supposed to move from in there. And no matter like all the headlines around it moving again, I think it's even if things were to change, they're not going to change overnight and haven't changed overnight.

3:17Tom Kehoe: I think there is that kind of fragmentation when it comes to supply chains. then I think trade and tariffs that we used to report on extensively have suddenly become part of life. But it's still a fragmentation of sorts that allocators are having to look at every single day and position their portfolios accordingly. Then you have the central banks. You have the Bank of England, Fed, the ECB used to work all together around similar issues of inflation. and but now the problem is they're all looking at things very differently because there's a fragmentation of central banks if you may and then finally I think if you look at the equity market they've they've all changed I mean they've they're fragmented in a way that you have these mega cap AI players sitting atop and and they completely move the entire index and and there's a fragmentation between what those players are doing and the rest of the index and I think when you look at all those things together, what ties them is, according to a lot of investors that we spoke to, is the fragmentation.

4:25Tom Kehoe: And not necessarily as a bad thing. I mean, we'll discuss that and what we did in the report as well. But I think they look at the world now in 2026 as a fragmented world and not just an event happening, which has led to a little bit of a fracture, which will go back to it. I think we're just living in a much more fragmented world. and I think investors are preparing quite significantly for it.

4:49Manas Singh: Yeah, and a big thank you to all those investors who have contributed to this report. This report's been going on for a number of years now, but we really do value their insights and their participation in these surveys. They get inundated with surveys all the time, but it's nice of them to continue to vote with their feet and to support our work and to support the thought leadership around this. and we do hope that they also get benefit from the findings of the research. One thing that I found interesting is that allocators, they don't seem to be paralyzed by that uncertainty that you've described.

5:26Manas Singh: If anything, they appear to be adapting to the situation. Has that surprised you in any way, Manus?

5:32Tom Kehoe: Not really, right? I mean, when you have billions of dollars to invest, I think you look at it from an opportunity point of view. I mean, obviously, there's elements to the story where there's real human lives at stake. I mean, obviously, the geopolitical tensions. I mean, to all our listeners in the Middle East, we're thinking about them. And it has been a rather tough time this year. But if you look at that fragmentation that we were discussing, from a lot of allocators' perspective, they do see it as an opportunity to invest in good managers. and when things stop moving together and you obviously have a fragment a fragmentation of sorts it uh it's more it's sort of more good for a good manager to to to pick apart to to actually work with i think when uh you and i have discussed this over the last i mean 10 years that we've known each other almost um there was time when i had joined uh when i started working on these research pieces 10 years ago.

6:37Tom Kehoe: I mean, I was told the hedge fund, like hedge funds are dying, hedge funds are dead. I think that was down to, it wasn't down to the fact that the managers are not good enough. It was just down to the fact that we were in the longest bull market. Things were all moving together at the same time. The world seemed like an easier place to invest in from a passive point of view. But I think when you have a world like that we live in today, And we've had that for a while now, since quite a few years and quite different shocks coming up. But now I think the reality now is the fragmentation. I think it is permanent.

7:09Tom Kehoe: And I think allocators are not seeing it from at least our survey that we're seeing and the ones that we spoke to for interviews. We're not seeing them retreating in any sort of way, shape or form. They are looking for at this hard world. It's from not a passive point of view, but a world where they can be active in. And when we asked them what they plan to do with hedge funds over the next six to 12 months, none of them said they're going to cut significantly to that investment. So that should tell you that they're all looking at it from a point of view of that a good manager looks at this fragmentation and sees the opportunity, sees the alpha, and can deliver them uncorrelated returns, which is obviously what allocators want for the people that they're investing money in.

8:00Manas Singh: Well, let's take this apart a little bit, just dive a little bit more into the hedge funds. But the headlines have been relentless, like you say, Manus. It's been the geopolitical headlines in particular have been really dominated news right throughout the news cycle, right throughout the last. It seems forever, like you said. And then you've got the threat around inflation and higher inflation rearing its head again. We've had the tariff situation. We've talked about the various issues as well when it comes to the Strait of Hormuz. and other measures that are being used, all of that is impacting on supply chain, all of that is impacting on how economies are growing or not growing, as the case may be.

8:49Manas Singh: But yet investors, if you say, it appears anyway, through the findings of the survey, have become more comfortable. And that's what the report has been telling us anyway, they're more comfortable operating in these market conditions. And just to pick a point and to follow up from a point that you've just made there, Manis, was one of the things that's striking from the report is that investors continue to allocate to hedge funds. And it feels like the conversation has really shifted away from investors chasing returns. So would it be fair to say that investors now are looking at hedge funds as a portfolio construction tool rather than just another asset class?

9:33Tom Kehoe: I can't agree with you more and I think interestingly enough for a lot of I mean if you may sophisticated allocators that has always been the case I think the idea of looking at hedge funds is just return enhancers I think is something that a lot of allocators have been wary of because obviously they're looking at hedge funds in at times a lot of these allocators were allocating to hedge funds at a time when the equity markets were having a blast and there was money to be made in different kinds of trade. We were in a very low zero interest rate regime. And I think it's the same allocators now and this is where their opportunity is.

10:16Tom Kehoe: I think the confidence that's showing in hedge funds is quite high still. If you look at it from just one of the questions that we asked, how many of them are confident in their hedge funds delivering returns in this environment, majority of them said that they would, even though there was a bit of a drop since earlier this year when we worked on this report together. But what is a significant finding in that area is that they all haven't changed how they view the hedge funds performance this year. So clearly, there's a continuation. They know what value that hedge funds are bringing to the table.

10:57Tom Kehoe: And when we ask them what that value is, and you're absolutely right, it is the top 71%, I think, that's a massive proportion of allocators say that it is diversification. Returns don't track as much compared to that. And then after that, you have protection in a bad market, which is majority of allocators say that as well. And a minority of allocators say that obviously they're looking for higher return potential when it comes to hedge funds, but that is definitely not a leading factor for allocators. In obviously what we discuss in a fragmented world where shocks can come from any side or any part of the portfolio of these allocators, it could be yeah it could be from the equity side from the bond side obviously we've aim has done some fantastic work over the years around like the 60 40 portfolio being dead like all of that stuff right so i think the idea is that finally you have hedge funds showing their value when it comes to protecting them from from a bad market even though i think we've not seen a terribly bad market.

12:12Tom Kehoe: But I think everyone is sort of making sure that they have good managers in their portfolio, instead of just seeing it as a massive asset class to invest in.

12:24Manas Singh: So if investors are thinking differently, and this is what the report is suggesting in your conversations with investors have been telling you the same, should hedge fund managers then be thinking differently as well, in that they spend maybe less time about outperforming benchmarks and more time explaining how they can fit within that institutional portfolio.

12:48Tom Kehoe: Absolutely. I mean, the number of times I receive these press releases, if you may, which basically lead with performance. And then when you try to sort of double tap into some of the strategy stuff and where it sort of would fit in in an allocator's portfolio that sort of sometimes is is missing from the story and i think um obviously it is quite important to lead with performance we've had months like march 2026 where uh a big chunk of the industry sort of lost money and then april you you you had a lot of managers sort of claw that back you want to make you want make sure that you can you're able to tell that story so that allocators know that how you perform but i think uh it's not just about performance anymore and i think that's the conversation that it's getting much louder uh i think it's uh it's it's historically hedge funds have sort of led with their performance numbers and i think obviously they should continue to do that but the first thing an investor now wants to know from our conversation is what it replaces in their portfolio and what it would look like to have a bad month and how would that impact, how would a bad month that a potential hedge fund manager has would look like in the other parts of their portfolio.

14:07Tom Kehoe: I think if you cannot answer that in sort of one sentence in like an elevated pitch, if you may, you're competing against on what they rank fourth in their list of things they're looking at at the moment.

14:23Manas Singh: Tell me about the report and then as it describes investors' preference or preferences for particular strategies. Anything of a surprise to you? What's the direction of travel as terms of how investors are viewing the various hedge fund strategies for their portfolio?

14:41Tom Kehoe: So, Tom, first, as you already mentioned, I'd love to thank the allocators who fill out the survey because we keep asking them that question, right? And I've seen that on the survey sometimes it can be a little uh daunting to then arrange all of the strategies that you're interested in and and um yeah i would love to thank all all the allocators who do put the time and and and give us these incredible uh answers that we can then share share with them and with the managers to know what's happening in the industry when it comes to the strategy preference i don't think there's a big shock there i mean you have multi-strat uh long, short, and macro obviously leading.

15:22Tom Kehoe: And that makes a lot of sense. But multistrats now, obviously, we've been talking about diversification, right? I think that story sort of almost lends itself to the fact that a lot of allocators looking at multistrats as a fantastic way to diversify. So from a strategy point of view, no big shocks there, no big surprises there. But I think we're seeing a bit of bigger movement into the multistrat universe. And I mean, we've seen so many headlines around some of the bigger multistrats raising capital again, the AUMs going higher and higher, and then looking for opportunities from other managers, sharing ideas from an alpha capture point of view.

16:04Tom Kehoe: And I think it's, I would hate to use this term, but I think there is some sort of trickle-down economics there as well, where the bigger multi-stats growing doesn't mean that the rest of the industry is falling behind. I think there is a lot of resource sharing at this point, and we'll see that potentially more in the coming years.

16:23Manas Singh: The reason that investors gave for liking these strategies feels slightly different this time around, in that to pick up a point that you have made here, it's less about delivering out performance, but it's more about taking the wider macro issues and consequences and how they're using strategies or a particular strategy to manage the risk in the portfolio, right? Absolutely. That's what's come clear in the results of the report. Absolutely.

16:56Tom Kehoe: And I think multi-strats, I mean, at its very core, it's all about risk management. And I think we're also seeing a lot of allocators saying like really interesting stuff about long short. I mean, for the longest time, the short book, the short side of the book was quite difficult for managers to talk about when it came to having conversations with allocators. I mean, a lot of it lost a lot of money. But now I think there is an inherent value in the short side of things when you have a month like March 2026. And obviously, the whole year has been around geopolitical shocks. So you have macro there.

17:39Tom Kehoe: And managers who are clearly seeing those different fragmentations in the equity, you have long short, and then obviously, the macro, you have people looking at the geopolitical climate. And then finally, you have on top of the podium, multi strat, which is basically managing risk across all different, many different strategies. So yeah, I think it's not a big shock, but it's very interesting when you look at it, because it sort of takes you from all the different findings, you can clearly map out why exactly managers, allocators are looking at managers within these strategies.

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19:43Manas Singh: Let's move on to fees. that's always a very lively conversation. There's been a narrative for years that investors are consistently looking to drive fees down. But your research suggests the conversation has become a little bit more nuanced. What's changing there?

20:02Tom Kehoe: And it's absolutely right. I feel what is very interesting, it's not the first time allocators have said that. So once or twice, like we've done this report, there's a fourth report with allocators. And what has been quite consistent is, and now we can say it with a lot more confidence, I think, is that allocators are willing to pay more for a differentiated strategy. the idea that 220 is dead. I mean, of course, I spoke to a couple of allocators, massive allocators from different channels. You have institutional wealth managers and family offices. And all of them, they all agreed on the fact that there is no standard fee anymore, of course.

20:48Tom Kehoe: There's no 220. That is for sure. But the idea is that if you can make a case of why your strategy is differentiated and how it would give an allocator uncorrelated returns, and how it is different to the rest of their investments in their portfolio, they're willing to actually pay more. I think that's the nuance in there. And if you look at the percentage of allocators, 69 % have said that there's no real change in fee over the last six to 12 months. One in five is pushing for lower fee. And almost one in 10 is saying that, yeah, we're really happy to accept higher fee for the right strategy, which tells you all about it, because I think it comes in all flavours, the fee now.

21:40Tom Kehoe: But from a management fee point of view, I think when we look at it, the biggest chunk of allocators say that it entirely depends on the strategy, which is quite interesting.

21:53Manas Singh: Yeah, and understanding what you're paying for as well. I mean, it's less about paying less now and more about understanding what you're actually paying for. So that does chime with the feedback that we get as well from investors. pick up a point that you just said there Manus is that investors are prepared to pay and will pay where it is accretive to their portfolio where the outcome has done something if it's managing risk or if it's preserving capital or if it's combination or both or if it's delivering uncorrelated returns where it's doing something that's outside of maybe their wider investment ambition.

22:33Tom Kehoe: And it goes, sorry, I think it goes back to our conversation earlier, right? What are you paying for? It's not just for performance. If it was for performance, you might get a lower fee. But if you can make a case of why, how you're diversifying, how you're different to the remainder of the portfolio, I think you can ask for more, which I think has changed over the years now, it was quite difficult to ask for a higher fee at a time when a lot of allocators were not looking at hedge funds in the best light. But now in a fragmented world, in a world where you do need downside protection, where there is a bigger risk and volatility, if you're managing that risk, if you're managing that volatility and still finding uncorrelated alpha, I mean, it's a sort It's a seller's market.

23:26Absolutely.

23:27Manas Singh: Let's talk a little bit about, because the report doesn't just focus on hedge funds, it does focus on private credit. And as we know here in the long short, we have been taking a closer look at private credit over the past year. I'm also taking a closer look at the media narrative around private credit and to the extent that that is influencing the landscape, to the extent that that could be potentially influencing how investors view the role that private credit can play. What did the report tell us about how investors are thinking about private credit right now?

24:04Tom Kehoe: I think the report comes at a very interesting point. We're not, as you mentioned, the headlines around private credit, a bit of like the fear around private credit in general, in media. I think it's not just happened. I think we've been from the start of the year, we've had enough time for a lot of allocators to have a good think about it when we surveyed them in June. so almost a bigger chunk of the year went into their understanding of where private credit sits in the portfolio what is happening in the industry should they be concerned should they not be concerned we did ask them that I mean how concerned are you about the headline risk in private credit and interestingly enough not many takers right not many of them are extremely scared I mean you had 14%, which is not a large number, which is looking at it from on the back foot and seeing what...

25:04Tom Kehoe: So one four, 14. One four, correct. Yeah. And so they're looking harder at what they own rather than getting out as well. But I think most of them, two thirds say that it's impacting their allocation into private credit minimally or not at all. And I think that's a very interesting thing when you see. And of course, our sample lens leans institutional and institutions were always going to sit tight and partly because of, obviously, as we know, the temperament and partly because getting out of illiquid funds quickly is genuinely difficult. But when we asked, yeah, We've asked in June, so nearly a year into, as I mentioned, into all this bad news about private credit, if people were going to panic, I think they had enough time to do it.

25:57Tom Kehoe: And nobody, not, I mean, according to our survey, and obviously needs to be taken with a pinch of salt. It's a massive industry with allocators across the world. And I'm sure there's a different understanding of where private credit is going. But from our survey, I think nobody seems to be panicking for sure.

26:17Manas Singh: Right. They see the value proposition for private credit. They see the role of private credit can play. And potentially they, maybe not potentially, the headlines and any headline risk around that, they are taking a closer look at that. And right now they're saying that they're still very confident in the value proposition for private credit, which is, again, very encouraging in terms of, well, certainly for our own engagement as well, as we think about how best to manage that narrative. It's very encouraging to hear that the very people that would be underwriting the investments and the very people who would be backing this industry continue to do so.

27:06Manas Singh: One thing that did catch my eye was investors' view. And this is something that you picked up in a previous report as well, Manas. So it would be good just to spend a little time on that. How investors think about hedge funds moving into private credit.

27:20Tom Kehoe: Tell us what you found there. It's interestingly enough the strongest single view in the survey, which is quite interesting. I mean, when we asked allocators what they think of hedge fund managers moving into private credit, offering, looking for opportunities there, using their understanding of the markets and alpha and trying to find opportunity in private credit, which obviously in our conversations with hedge fund managers, we've seen obviously some managers do it, especially multi strats. And I think we recently also published a report around or we're about to actually, sorry, publish a report around hybrid funds.

27:59Tom Kehoe: And I feel like EMA has also done some really interesting work around hybrid funds. Right. And we're seeing this blurring of lines between private and public markets in when it comes to hedge funds and private equity. but when we asked how allocators felt about hedge funds dabbling in in the private markets especially private credit 60 percent of them said that they they would rather look at somebody who specializes in private credit rather than hedge fund managers looking at it they want definitely want exposure because private credit still tops and i think it's important to talk about it still tops in our survey as the most valuable and the most wanted asset class beyond hedge funds.

28:47Tom Kehoe: And that's quite interesting when you ask the same allocators who invest quite significantly in hedge funds, would you be happy if your manager was looking at private credit? He was like, probably not. Is it the answer? And obviously, that could change. And I'm really excited how this conversation changes when we have more conversations around hybrid funds. And the better stories start coming out and we'll be there for it.

29:12Manas Singh: So you're working on that now, Manus. When is that report out? When can listeners get access to this report?

29:19Tom Kehoe: This report should be out this month. Fingers crossed. I think sometime in August. Yeah, sometime in August. And yeah, really looking forward to the understanding because it's in collaboration with Private Equity Wire, which is our sister publication. So we're looking at it from both lenses on private equity firms looking at public equities and looking at more liquid offering in their portfolio. And then on the other side, hedge funds looking at illiquids and how that's going to go forward.

29:53Manas Singh: So this has been really, really useful, certainly for me to recap the work that we helped you with, Manus. And like I said, this has been a project that we've been doing in conjunction with Hedge Week, AMA that is, for the last two years. You've spent months speaking with allocators, putting this report together, like you said at the beginning of today's episode. So if we fast forward to December this year, by then the hybrid report and various other reports will have been published by Hedgeweek. And taking forward the 2027 Investor Survey. So we do this report every six months. So the next report coming out in December, we'll be looking at how investors are viewing the world for the first half of next year.

30:42Manas Singh: What do you think we'll be talking about, Dan?

30:46Tom Kehoe: The one story that we've seen over the last four reports or two years, I think, is that allocators are very interested in hedge funds and that interest is increasing, that confidence is increasing. Every time we ask them, a big chunk of them is increasing allocations into the hedge fund bucket. I think what would be interesting at the end of the year is that what section of the portfolio this allocation is coming from? Because if this amount is increasing, Is it coming from their allocation to potentially where it was going to private equity? And is it coming from bonds? Is it coming from the equity bucket?

31:28Tom Kehoe: I think that would be an interesting thing to see. And also, I mean, as we've been talking about a fragmented world, I mean, I would love to see how hedge funds perform in the remainder of the year and how that impacts allocators' minds because clearly not a lot is going against hedge funds at this moment especially from an alpha perspective there there are more and more opportunities every single day and and they're making the most of it so we could see more allocators getting even more confident in in in in this particular asset class and when that happens you be very interesting to see that if if the strategies that allocators are interested in also change.

32:14Tom Kehoe: But yeah, there's quite a few things to look at. And obviously, wealth managers are an interesting stream of allocators that we've been talking to quite a lot. And it would be interesting to see how they view hedge funds, because compared to institutional investors, big institutions and family offices, they were the ones a bit who were a little less confident in their hedge fund book. But I think that that could potentially change by the end of the year.

32:41Manas Singh: Well, there's one thing I've taken away from today's conversation is that investors haven't become more cautious. They've become more discerning. So they're clearer than ever about what they want hedge funds to do within a portfolio. And in today's environment, that is diversification, resilience and uncorrelated returns. They've arguably never been more valuable. and so the full report Manus is available on the Hedgeweek website right I know that we have got a link to it on our website so Manus it's been a real pleasure catching up with you again today and look forward to doing it all again in six months time brilliant thank you so much for

33:23Tom Kehoe: having me on Longshot absolutely love your podcast and yeah looking forward to be back on it again thanks again the Longshot was brought to you by AMA the Alternative Investment Management Association, the global representative for the alternative investment industry. As always, you can get the latest episodes by subscribing to The Long Short on Spotify, Apple Podcasts, Google Podcasts, and Amazon Music, or by streaming episodes directly from our website, aimer.org. Thanks for listening.

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