Infovest21 Investor Sentiment Indicator: Funds of funds continue to lose appeal relative to direct investing

In Infovest21’s just-released quarterly sentiment survey of investors, 31% of the investors said they expect to increase their hedge fund allocation while decreasing their funds of funds allocation. 42% don’t expect any change. None expected to increase the funds of funds’ allocation while decreasing the hedge fund allocation.

These responses reflected a change from the prior quarterly survey when two-thirds of the investors said the expected no change and only 10% expected to increase their hedge fund allocations while decreasing that of funds of funds. At that time, 5% planned to increase their allocation to funds of funds.

Lois Peltz, president of Infovest21, summarized some of the other highlights of the survey:

 44% of the investors feel managers have the upper hand in the relationship between investors and managers while only 19% feel an equal balance exists.

 The largest percentage, 48%, said they do not plan to increase their hedge fund allocation over the next 12 months. Another 15% said they plan to increase allocations significantly and 19% plan to increase slightly.

This reflects a noticeable change from the prior quarterly survey where the largest percentage, 52%, said they planned to increase hedge fund allocations while one-third planned no change.

 While most investors did not feel registration would affect their views or allocations of hedge funds, some interesting observations were made. For example

o Some strategies will be more impacted than others. Those which depend on leverage or riskier securities for return will be less attractive.
o Impact on funds of funds will not be as significant as with hedge funds.
o Smaller managers will be less impacted than larger managers as they will be regulated by states rather than the SEC.
o Some managers may decide to close their funds or partner up with larger organizations rather than register.

 Of the various strategies, investors remain the most positive about event driven/special situation over the next three months - 27% of the investors are “very positive.” Event driven/special situations had the highest rank last quarter as well.

 Of the 22 strategies asked about, the majority of investors felt “somewhat positive” about 12 over the next three months, “neutral” about 8, and “somewhat negative” or “very negative” in two. In the prior quarter, investors were “somewhat positive” about six strategies and “neutral” about 16.

Energy, distressed, event driven/special situations, global macro and multi-strategy were among those strategies investors were “somewhat positive” about.

More optimism on the investor front in the near-term
Of the various strategies, investors remain the most positive about event driven/special situation over the next three months - 27% of the investors are “very positive.” Event driven/special situations had the highest rank last quarter.

In 12 strategies, the majority of investors felt “somewhat positive” which is considerably more than the six strategies cited during the prior quarter. In rank order, these are: energy (62%), distressed (58%), event driven/special situations (50%), global macro (50%), multi-strategy (50%), volatility arbitrage (46%), merger arbitrage (42%), managed futures (42%), equity long/short (42%), emerging markets (42%), fixed income arbitrage (35%) and activists (33%).

In eight strategies, the majority of investors felt “neutral” compared with 17 strategies last quarter. In order, these are: sector (72%), ETFs (58%), convertible arbitrage (54%), mortgage backed (48%), short biased (42%), statistical arbitrage (42%), fixed income (42%) and market neutral (38%).

In two strategies, the majority of investors felt “somewhat negative” or “very negative.” 37% felt “somewhat negative” about asset based lending and 33% felt “very negative” about PIPES.



Methodology: Infovest21 conducts this survey on a quarterly basis.
This quarter, 30 investors responded. Of those, about 41% were funds of funds, 26% were family offices, 26% were consultants and 12% were pensions and endowments.