Hedge funds tapping private markets for higher returns
70 per cent of hedge funds now invest in private markets in the pursuit of higher returns, new research has found.
A survey by IG Prime, a prime broker for hedge funds and family offices, showed that hedge funds are now allocating to a wider array of alternatives, amid growing investor demand for private markets assets.
61 per cent of hedge funds said they now invest in private equity, while 45 per cent allocate to private real estate.
Read more: Private markets gaining attention in thematic investing
39 per cent of respondents said they invest in private credit, while 38 per cent invest in infrastructure.
Hedge funds’ expansion into private markets means they are increasingly competing with private equity funds who have also been expanding from private equity into other private asset classes such as infrastructure, private credit and real estate.
“The growth of hedge funds has meant that there has been a crowding of trades that have traditionally worked well for them,” said Chris Beauchamp, chief market analyst at IG Prime.
“Arguably some of the opportunities have been arbitraged away which has driven funds to look for new ways of getting index-beating returns. Many hedge funds are seeing private markets as an answer.”
Read more: Debt funds increase market share against banks across Europe
Private equity is the private market asset class with the fastest growth amongst hedge funds, with 58 per cent of hedge funds saying they have increased exposure to the asset class during the last year.
Hedge fund managers are also increasing their exposure in real estate (48 per cent), private credit (31 per cent), infrastructure (30 per cent) and natural resources (34 per cent).
Despite its popularity, private equity has had a challenging few years, amid macroeconomic uncertainty and a muted M&A market.
However, private credit has continued to grow rapidly. 31 per cent of hedge funds said they saw private credit as the area of greatest growth within private markets.
Read more: Niche private credit funds capitalising on challenges facing big players
“While most hedge funds see private equity as the substantial growth investment in private markets, demand for hedge funds that invest in private credit have also been particularly strong,” said Beauchamp.
“The question for hedge funds is what skills they bring to bear in these private market that might give them the edge over existing participants such as PE funds. Some will be competing directly with PE and private credit funds for the same investments. Others will be hoping that they can use the current tariff related disruption to pick up assets priced for distress.”
IG Prime is the institutional business of FTSE 250-listed online trading platform IG.
