Crowded trades top worry list for hedge fund investors

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© Reuters. U.S. Dollar and Euro banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration

By Nell Mackenzie

LONDON (Reuters) – Concern that hedge fund portfolios contain too many of the same trades has shot up the worry list for global investors with hedge fund exposure, a Bank of America survey shows.

Over a fifth of big investors, such as pension funds and insurance companies, pointed to crowded trades as a top concern, said the survey about 2023 year-end sentiment which was released on Monday and seen by Reuters on Tuesday.

This was a notable increase from the 2022 survey which ranked “crowding” in sixth place. In addition, over half of the survey respondents put crowding concerns in their top three worries.

Hedge funds piled into the world’s biggest tech stocks at a record pace last year. In November, many systematically traded hedge funds were caught in losing trades when a herd-like stampede to exit them created bottlenecks.

A changing rates environment, risk management against losing trades and capacity constraints were among the worries investors in hedge funds cited, the BofA survey said.

Liquidity and geopolitical risks meanwhile fell down the ranking of concerns.

Still, hedge funds trading long and short positions in the stock market remained the top hedge fund strategy tracked by the bank and saw the biggest interest from allocators, said the BofA note.

Last year, these funds posted a 12.2% return, the note added.

Multi-strategy hedge funds suffered a fall in investor interest, from the second most asked after strategy in 2022 to the fifth in 2023, said BofA.

This waning of interest saw the biggest decrease from allocators in the Asia-Pacific region and from consultants, pension funds, sovereign wealth funds and asset management firms, BofA said.

Credit hedge funds saw the biggest jump in interest, leaping to the third most popular hedge fund in 2023 from the sixth in 2022.

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