LONDON, Aug 2 (Reuters) - Global investor appetite for

the most expensive multi-strategy hedge funds has fallen,

Goldman Sachs ( GS ) said in a report to clients seen by Reuters

on Friday, though more investors plan to add hedge funds to

their portfolios.

Goldman Sachs' ( GS ) data from a survey of more than 300 investors

like family offices, sovereign wealth funds and pension schemes

showed that just 15% expressed an interest in increasing their

exposure to multi-manager strategies with so-called pass-through

fees, where the hedge fund passes on its costs.

The figure has declined from just over a fifth of investors

willing to take on the extra fees this time last year, said

Goldman Sachs ( GS ).

The biggest multi-manager hedge funds charging pass-through

fees now take more than half of gains back, leaving investors

with an average 42% return on investment, after expenses and

performance fees were deducted, said an earlier report by

Barclays ( JJCTF ).

"If pass-through fees make the meal smaller, as an investor

you have to decide if the meal is still big enough or of such

high quality that you can live with a much smaller meal. It's

when you have a small, not so great meal that your cook has a

problem!" said Harald Berlinicke, partner at Sarnia Asset

Management.

These hedge funds saw their highest proportion of outflows

totalling 1.5% of assets managed in the first half of the year,

with net outflows overall about 1.1% of assets managed across

all strategies, except systematic investing strategies, which

saw net inflows.

"The flows picture has remained challenging thus far in

2024," Goldman's report said.

Goldman said endowments and foundations may have withdrawn

funds to pay for other parts of a portfolio tied up in private

markets.

The survey also showed, however, that the highest proportion

of investors since 2020 planned to add more hedge funds to their

portfolios.

Hedge funds beat private credit for the first time as the

most popular asset class overall. The much-hyped strategy where

companies borrow directly from specialised funds, bypassing

banks and the bond market, saw the proportion of investors

looking to cut their exposure almost double to 11% from 6% in

2023, the bank said.

Most investors willing to increase spending on alternative

investments that Goldman surveyed generally did not change their

minds from a similar survey the bank ran in 2023 except for a

huge drop in interest funds that take long only positions in

bonds.

Customer optimism for hedge funds has rebounded to the

highest level since 2020, with over 85% of investors telling

Goldman that performance of their hedge fund portfolios exceeded

or met expectations for this year, up from 67% in 2023.

"Given this year's decent returns, the multi-strat space is

a long way from any sort of crisis," said Jon Caplis, chief

executive of hedge fund research firm PivotalPath.

Multi-strategy hedge funds tracked by PivotalPath have

returned more than 6% through June.

"However, we are seeing an increasing dispersion between the

better performing multi-strats and some of the pretenders to the

throne who have ambition, but also struggle for scale and

talent," said Caplis.