Investors plan shifting cash to hedge funds, Credit Suisse study suggests

The long-awaited large transfer of ‘cash on the sidelines’, built up during the crisis, into hedge funds could be about to start, as some allocators told Credit Suisse they will almost halve cash positions from 7% to just 4%.

This would be their lowest uncommitted amount for at least three years, according to the annual report on the industry from the Swiss bank.

The low planned unallocated level, mentioned by funds of funds, would be far below their average 12% cash at the start of 2009 – as hedge funds began their best year ever – and the 5% cash by 2011, when the industry had its second worst year by its own high standards.

And while investors cut their own cash positions in order to allocate to funds, about three quarters do not mind if their chosen managers hold high cash levels themselves for long periods “if justified by market activity and/or the manager’s strategy”.

Robert Leonard, global head of Credit Suisse Capital Services, said there was a willingness among investors to redeploy cash and cut the levels built up in 2011 – as funds lost 4.8% – but this might not happen until the second half of 2012.

He added: “During the fourth quarter of last year, investors lacked a clear catalyst for making new allocations and began to explore how to selectively upgrade their portfolios. They focused heavily on the performance of their existing hedge fund allocations, applying extensive analysis to ascertain which of their existing managers had the capacity to outperform in volatile markets while simultaneously limiting downside risk.

“As a consequence of this exercise, cash balances have remained high. Cash balances at funds of hedge funds rose to 7% on average during 2011 versus the historical average of 4%.

“We find it significant that in the face of tumultuous markets and regulatory environments, investors remain committed to the asset class and steadfast in the belief that hedge funds are a valuable component of a diversified investment portfolio and capable of producing absolute returns,” the bank’s report said.

But allocators will approach the industry in 2012 with a distinctly pragmatic mind-set, according to the survey, which polled about 600 investors that in aggregate allocate about half the industry’s total assets.



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