Investors are jumping back into hedge funds and it shows they think a recession may be coming

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With growing concerns over a coming recession, investors are looking past hedge funds’ disappointing 2018 and padding their portfolios this year.
Morgan Creek Capital Management Mark Yusko, who advises family offices and institutions on their portfolios, is pushing for investors to allocate as much as 60% of their assets to hedge funds.

Investors hated how their hedge fund investments performed in 2018, but still trust certain strategies enough to protect them from a coming recession.

A majority of investors plan on increasing or maintaining the percentage of their portfolios invested in hedge funds this year. Nearly four out of every five investors surveyed by Preqin are at the very least keeping their assets in hedge funds, the highest figure since 2014, with the hope that hedge funds can keep the boat steady in a potentially rough market to come. The same survey also found that investors increasingly believe the long-running bull market is coming to an end, with 61% saying “equity markets are at a peak."

Despite “demonstrated sub-par performance," Preqin’s report reads, investors "are still planning to increase their allocations" to hedge funds this year.

See more: Hedge fund billionaire David Einhorn used a bunch of New Yorker cartoons to explain why 2018 was such a brutal year

“We expect to see investors rebalance their hedge fund portfolios in the coming year as they position more defensively.”

That re-balancing will shift investors to hedge fund strategies that are unattached to the equity markets or hedge the markets with a combination of strategies. Through February, multi-strategy and credit funds have pulled in billions while the traditional long-short equity players that have dominated the industry have suffered redemptions, according to eVestment.

“Investors are putting their faith in experienced fund managers and truly non-correlated strategies, adding to the challenges facing less experienced managers and more trend-following strategies,” said Amy Bensted, head of data products at Preqin.

“Don’t wait to get punched in the mouth” is what Mark Yusko, CEO of Morgan Creek Capital Management, is telling clients. Yusko, the former head of UNC’s endowment, gave a presentation at the NY Alternative Investment Roundtable on Tuesday night titled “#2000Redux” — telling attendees they should build up their hedge fund portfolio before the markets hit a rough patch like they did in 2000.

See more: We got a copy of billionaire hedge-fund manager Seth Klarman’s letter to investors — here are his 5 biggest warnings about the economy

Yusko tells the family offices and institutions his firm advises to put 60% of their portfolio in hedge funds, a much higher proportion than what the average investor reports to do — 13.2% — in Preqin’s survey.

Yusko said UNC’s endowment was at that level in 2000 and was able to avoid many of the pitfalls from the dot-com bubble, but the typical hedge fund investor is much less reliant on hedge funds. Of hedge funds’ biggest institutional investors, only 10% of endowments and 8% of pensions invest more than half of their portfolio in hedge funds, according to JPMorgan’s study.

A turbulent end to the year resulted in the average hedge fund losing money in 2018, and big-name investors like David Einhorn, Cliff Asness, and Dmitry Balyasny were a few of the high-profile managers that were unable to escape the year unscathed. More than two-thirds of investors surveyed by JPMorgan said their hedge fund portfolio underperformed by at least 1%.

So far, hedge funds have had a good start to the year — along with the S&P — finishing March with the best first quarter performance since 2006, according to Hedge Fund Research, returning nearly 6% for the year.

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