A new Credit Suisse report about hedge fund investors’ appetites, titled “shifting tides,” comes to the somewhat re-assuring conclusion that, in some respects at least, the shift isn’t what one might fear.

The report begins with the simple observation that 2016, a year that began with unexpected swings in many basic commodity prices, and continued with the unexpected victory of the “leave” faction in the Brexit referendum, was a “challenging” year for the hedge fund industry, “replete with media headlines forecasting a decline for the industry.”

Playing Catch Up

Many funds had a very disappointing first quarter in 2016 and “spent the subsequent three quarters playing catch up.”Less than one- third of the institutional investors surveyed reported that their allocations to hedge funds had met or exceeded their expectations in 2016. Further, the kind of allocations that investors are making has shifted. They are less interested than they used to be in broadly defined strategies such as Equity Long/Short Fundamental. They are more interested in equity L/S funds with a specific sector focus (health care for example).

All that said, though, the good news is that institutional investors in particular remain committed to the hedge fund industry.  A healthy 87% say they intend either to maintain or to increase their allocation to the industry over 2017. The same percentage said the same a year before.

Investors in general remain optimistic about 2017 target returns. Credit Suisse attributes the optimism in part at least to the sense that declining correlations and increasing volatility “could create more opportunities for hedge funds to create alpha” in the coming months.

Thirty-Three Strategies

The CS survey of investor sentiment first broke down investors’ likely allocation shifts within the hedge fund universe by strategy, calculating investor net demand. The “net” demand is the percentage of institutions that say they will increase their allocation to a particular strategy minus those who say they will decrease it.