JPM Reports Buyside Less Bullish on Hedge Funds, But Redemptions Seen Flat Traders Magazine Online News, March 6, 2015 John D'Antona Jr. It seems the institutional buyside is finding less to like about investing in hedge funds in 2015, but it is not giving up on the sector altogether. That's the findings by the JPMorgan Institutional Investor Survey - 2015, where the bank found that on average, hedge funds achieved positive performance in 2014 but did not perform as well as they did in 2013. The industry as a whole has significantly lagged the U.S. equity market since 2012. Nearly 55% of respondents indicated their hedge fund investments did not meet their targeted hedge fund portfolio return for 2014. The bank's survey noted that while hedge fund industry growth is expected to continue, the momentum it has gained over the past three years or so is expected to pull back slightly entering 2015. Net inflows and new capital are still expected to be put to work in 2015, just not to the degree that capital was in 2014. Half of all respondents indicated they would only allocate $50 million or less of new capital to hedge funds in 2015. "Investors also seem to be less bullish on hedge funds in general. Only 42% of respondents indicated they were bullish on hedge funds going into 2015, compared to 66% upon entering 2014," JPMorgan analysts wrote. "However, there are no clear indications that investors will be redeeming from the space in 2015. Rather, respondents appear to prefer remaining more neutral in 2015, making changes to existing hedge fund portfolios at the margin. The survey canvassed 386 institutional investors representing approximately $800 billion in Assets Under Management (AUM). The consultant segment, globally, experienced the most growth year-over-year as a percentage of the survey's respondent base (as measured by AUM in hedge funds). Consultants accounted for nearly one-quarter of survey participant AUM in hedge funds this year, compared to 14% last year. This growth is from new entrants, as well as from organic asset growth as consultant firms take on new institutional clients such as pensions and endowments & foundations, many of them investing in direct hedge funds for the first time. Appetite for new hedge fund launches is holding steady. Investors are not only more interested and willing to look at new launches, but are now starting to actively allocate to start-up managers. Nearly half of survey respondents invested in at least one start-up manager in 2014. Founders' share classes are the most common type of start-up investment made by respondents. Other types include acceleration capital, negotiated managed accounts, and seed economics. Also, while respondents continue to focus on liquidity, an overwhelming majority are willing to accept a lock-up period of one year or more. There is a healthy appetite for longer lock-up vehicles focused on hybrid/illiquid opportunities, as well as for co-investment opportunities. Looking ahead, respondents may only be making small changes to overall hedge fund portfolios in comparison to past years. The largest expected net increase noted across strategies entering 2015 was only 5% compared to 17% upon entering 2014. Of hedge fund strategies, fixed-income arbitrage experienced the greatest growth year-over-year, with 46% of respondents invested in the space in 2014 as compared to 27% in 2013. This growth is consistent with strategy capital flows across the broader hedge fund industry. Fundamental Long Short Equity continueD to be the strategy that most respondents are invested in. The survey noted that 90% of respondents were invested in the strategy in 2014 compared to 84% in both 2013 and 2012. Lastly, while JPMorgan expected continued growth for the hedge fund industry in 2015, the momentum it has gained over the past three years is expected to pull back slightly. "Given performance challenges relative to broader markets, expectations for hedge fund capital net inflows and new capital allocations for 2015 are down slightly compared to 2014," JPMorgan analysts concluded.