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Investors tire of hedge funds, but keep them for the downturn

Hedge funds have delivered subpar returns for more than a decade, but a new survey from Preqin finds many investors are planning to stick with them because they fear another sharp market downturn is coming.

What it means: Half of the investors surveyed said their hedge fund allocations failed to meet expectations, and only 37% believe 2019 performance will exceed 2018’s levels. This follows an Axios analysis that found hedge funds had underperformed the S&P 500 by more than 100% since 2009 and less than 1% of the gain in Americans' financial assets has been in hedge funds since 2015.

Yes, but: 61% of investors in Preqin's survey say the current equity market cycle has peaked (up from 45% a year ago) and 40% are looking to position their hedge fund portfolios more defensively as a result. Further, 4 out of 5 investors plan to hold or raise their allocation to hedge funds over the longer term — the highest proportion since 2014.

  • Hedge funds did much better than traditional equities during the global financial crisis.

The impact: "This is a pivotal moment for the hedge fund industry," Amy Bensted, Preqin's head of hedge fund products, said in a release.

  • "Fund managers may be optimistic about their longer term relationship with investors, but they will need to work hard in the coming months to effectively attract and retain capital."

Go deeper: Explore why the hedge fund moment is over