How Hedge Funds are Navigating a Volatile Market

Survey Scope & Methodology

• Goldman Sachs Global Markets Division surveyed nearly 450 hedge fund allocators and 200 hedge fund managers.
• Allocators surveyed represent approximately $1 trillion in hedge fund AUM, constituting nearly one-third of the global industry.
• Survey participants included pensions, endowments, sovereign wealth funds, and family offices, covering a broad spectrum of strategies, geographies, and firm sizes.

2020 Industry Performance & Sentiment

• Hedge funds delivered an average return of over 20% in 2020, significantly exceeding the 10-year prior average of 6.5%.
• In Q1 2020, hedge funds lost approximately 7% while equity markets fell 21%, capturing only about one-third of the downside drawdown.
• From April to December 2020, hedge funds returned roughly 30% against a 47% gain in the MSCI World index, capturing almost two-thirds of the market's upside rebound.
• Entering 2020, over 50% of investors reported their hedge fund portfolios had underperformed expectations over the prior five years, while only 6% reported outperformance.
• Despite initial underperformance sentiment, significant redemptions were avoided as allocators retained capital citing the value of hedge funds in volatile, high-dispersion environments.

2021 Outlook & Asset Allocation

• As of end-2020, hedge funds ranked as the second most popular asset class for intended allocation increases in 2021, trailing only private equity.
• 43% of allocators plan to increase allocations to equity long-short strategies, with specific demand for sector-oriented funds in biotech and TMT.
• There is a noted shift in strategy preference: demand has risen for discretionary macro managers while interest in systematic/quant strategies, including CTAs, has declined.
• Nearly half of allocators intend to increase geographic exposure to Asia in 2021, with a distinct bias toward China.
• The industry saw a slight reversal in portfolio concentration trends, with the average number of hedge fund relationships per investor rising slightly from 23 (beginning of 2020).
• 2021 is projected to see net new inflows of approximately $35 billion, driven primarily by cash previously held on the sidelines and redemptions from long-only fixed income portfolios.

Fee Structures & Economics

• Management fees declined by 15% and performance fees by 10% between 2012 and the onset of 2020; however, 2020 marked a reversal in this trend.
• In 2020, average management fees rose by 5 basis points and performance fees rose by 80 basis points, the first increase recorded in the data set.
• Fee increases were driven by strong industry performance shifting focus away from cost, and capital inflows to blue-chip managers reopening in March-April who command higher fee structures.

Industry Growth & Capital Flows

• The industry reached a record AUM level of $3.6 trillion in 2020, growing by approximately $400 billion.
• This growth was entirely performance-driven; Goldman Sachs estimates there were zero net new capital flows (inflows minus redemptions) in 2020.

Manager Selection & New Launches

• Goldman Sachs hosted more new hedge fund launches globally in 2020 than in any prior calendar year, despite pandemic disruptions.
• Interest in funds with track records under 18 months increased year-over-year, driven by expectations of superior outperformance and more favorable negotiation terms compared to established funds.
• 90% of allocators executed at least one virtual allocation in 2020; 45% of these allocations went to managers never met prior to the pandemic.
• While virtual engagement increased (via webinars, video presentations, and white papers), the majority of allocators do not anticipate resuming full in-person due diligence until Q3 2021 at the earliest.