Heading into 2025, investors had been telling us about there was momentum towards investing more into hedge funds broadly. Expected volatility and dispersion, macroeconomic concerns, and higher interest rates were all cited as reasons to increase hedge fund exposure with the funding source being global equity exposure. For many, the hope was for increased private investment distributions, and that capital could be reallocated to hedge funds to lower overall risk exposure.
Market volatility began to pick up in March and spiked in early April following the Liberation Day announcement of increased tariffs. During this period, institutional allocators reported that they were focused on responding to inquiries and concerns from constituents. The sharp market movements did not allow for broader discussion around asset allocation changes and considerations of new manager hirings.
At the time of writing, the U.S. equity market has rebounded considerably, and volatility as measured by the VIX has come back down. In this period of relative calm, we reached out to a number of allocators to hear their thoughts on 2025 so far and what lies ahead.
The most lasting takeaway from our conversations incorporate both the recent spike in market volatility and the more intermediate lackluster performance from private investments. As the title of this piece suggests, there seems to be a greater focus on the risk of illiquidity than the expected premium from having a large allocation to private investments.
Additionally, there are increased concerns around the tax-exempt status of non-profit institutions and cuts to grants to research and charitable organizations. For example, one large institution reported increasing their annual spending in order to support the organizations that have seen their federal support decreased. As a result, there is a need for greater overall portfolio liquidity.
Our colleagues in Europe report a similar expressed interest in liquidity in allocators’ portfolios. This focus on liquidity may result in lower allocations to private credit in favor of more liquid credit hedge funds.
Over the long-term, we believe this shift in focus ultimately favors an increase in the allocation to relatively more liquid hedge funds over illiquid private investments. Hedge funds that offer greater liquidity to investors will likely benefit those with longer initial lock-ups and less frequent liquidity.
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