BlackRock research arm bigs up hedge funds to investors

BlackRock's Investment Institute has issued its highest-ever recommendation for hedge fund exposure, advising investors to allocate up to 5% of their portfolios, potentially by reallocating from developed market government bonds or equities. This bullish outlook is underscored by hedge funds' 5.2% year-to-date return through July and an annualized 8% over the past five years, contrasting with lower bond returns. The recommendation aligns with broader industry efforts, including BlackRock's own lobbying and planned retirement fund launch, to expand access to alternative investments, signaling a potential shift in institutional asset allocation strategies.

Analysis

The BlackRock Investment Institute has issued its most aggressive recommendation to date for hedge fund allocations, advising investors to dedicate up to 5% of their portfolios to the asset class. This guidance is supported by a significant performance disparity, with the broader hedge fund universe returning 5.2% year-to-date through July and an annualized 8% over the past five years, figures that substantially outpace the approximate 2% year-to-date return of JPMorgan's global government bond fund. BlackRock suggests funding this shift by reallocating capital from developed market government bonds for lower-risk hedge fund strategies, or from equities for higher-risk strategies. This recommendation coincides with favorable regulatory developments, specifically a U.S. directive to expand 401k access to alternative investments, a change BlackRock lobbied for. The firm's strategic alignment is clear, as it oversees $76 billion in hedge fund assets and plans to launch a retirement fund including private assets, positioning itself to directly benefit from the increased investor flows it is encouraging.

Key Decisions for Investors

• Investors should evaluate reducing allocations to low-yielding developed market government bonds to fund a strategic position in hedge funds, given the compelling 8% five-year annualized return profile cited for the asset class.
• It is crucial to consider that BlackRock's recommendation, while supported by performance data, aligns with its significant commercial interests, including its $76 billion in hedge fund AUM and its role in lobbying for expanded market access.
• Monitor regulatory developments and capital flows related to the inclusion of alternative investments in 401k plans, as this represents a potentially transformative long-term tailwind for hedge fund demand and valuations.