A new survey of institutional investors in hedge funds finds 42% of investors reporting more difficulty in sourcing attractive funds to invest in last year than in 2015.
The findings were based on a poll of 178 investors polled in June by alternatives data provider Preqin.
Forty-nine percent of respondents said they planned to reduce allocations over the coming year. The survey showed that longer-term performance was a key element in their allocation decisions.
"Hedge fund investors recognize that the performance of the industry has made some progress over the past year, but they still have serious concerns over the returns generated by funds in their portfolios," Preqin's head of hedge fund products Amy Bensted said in a statement.
In August, hedge funds recorded a 1% return for the month.
Of those investors in the survey planning to reduce investments, 38% cited the industry's unsatisfactory three-year performance. Sixteen percent pointed to the negative outlook on future performance, and 13% to high fees.
Forty-eight percent of investors reported that fewer than half of their portfolio hedge funds had met expectations over the past 12 months. Thirteen percent reported that they had constructed portfolios in which all funds met their expectations over that period, but 12% said that all of their holdings had failed to meet their benchmarks.
When selecting new funds, 76% of investors said they looked for a successful team performance track record, while 54% seek proven experience and 51% successful firm-level performance.
However, performance can differ between leading strategies and within them. Preqin said interquartile ranges for annualized three-year returns varied from 5.1% for relative value funds to 7.7% for macro strategy funds.
