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Hedge fund portfolios and crowded trades in the spotlight

Hedge fund portfolios and crowded trades in the spotlight

Global investors with exposure to hedge funds are experiencing a significant surge in concern, primarily focused on the concentration of similar trades within these portfolios, as highlighted by a recent survey conducted by Bank of America.

The survey, which delved into sentiments towards the end of 2023, uncovered that more than a fifth of major investors, including pension funds and insurance companies, have identified crowded trades as a top worry as reported by Reuters here.

This represents a substantial escalation from the 2022 survey, where "crowding" found itself in the relatively less alarming sixth place. Additionally, it was noteworthy that over half of the respondents flagged crowding concerns within their top three worries.

The heightened anxiety surrounding crowded trades can be traced back to the considerable influx of hedge funds into the world's largest tech stocks over the course of the previous year.

In a particularly notable event in November, several systematically traded hedge funds faced significant losses when a collective rush to exit these positions resulted in bottlenecks and challenges, adding weight to concerns about the potential risks associated with such concentrated trading strategies.

According to the findings of the Bank of America survey, investors in hedge funds have also voiced worries about the changing interest rates environment, the imperative for effective risk management against potential losses, and the constraints on capacity within these funds. Notably, liquidity and geopolitical risks, which have historically been key concerns, experienced a decline in their ranking among the worries cited by investors.

Despite the various concerns expressed, hedge funds engaged in long and short positions in the stock market managed to retain their top-tracked status by the bank and garnered the most substantial interest from allocators.

The survey disclosed that these funds delivered an impressive 12.2% return over the preceding year, reinforcing their appeal despite the growing apprehensions within the broader investment landscape, Reuters reports.

Conversely, multi-strategy hedge funds witnessed a decline in investor interest, slipping from the second most sought-after strategy in 2022 to the fifth in 2023, according to Bank of America.

This diminished interest in the multi-strategy approach was particularly pronounced among allocators in the Asia-Pacific region, pension funds, sovereign wealth funds, and asset management firms, signaling a shift in preferences and risk appetite among these key players in the investment landscape.

Credit hedge funds experienced a significant upswing in interest, leaping to the third most popular hedge fund strategy in 2023 from the sixth position in 2022, according to the Bank of America survey.

This shift underscored a dynamic investment landscape where investors were actively reevaluating and adjusting their hedge fund allocations based on changing market conditions, perceived risks, and evolving investment strategies.

The increased interest in credit hedge funds suggests a nuanced response to the evolving market dynamics as investors seek strategies that align with their risk tolerance and performance expectations.



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