Hedge funds performed nearly a third as well as stock markets last year.
The HFRI Fund Weighted Composite Index, comprising of over 1,400 single-manager hedge funds, returned 10.4% in the year leading to 31 December 2019.
But private banks are sticking to their guns. HSBC Private Banking believes the investment vehicle is still valuable, as its returns are largely uncorrelated to market cycles.
'If you have equity markets going down, they do significantly less badly. When [equity markets] go up, they do a little less well. That ratio is relatively good,' said Willem Sels, its global chief market strategist.
Like other private banks, HSBC doesn't expect equity returns in the tune of 2019 – where some investors cashed out almost 30%.
'If we were to expect the same kind of returns, we wouldn't be advocating hedge funds because they would underperform. But if you have a milder appreciation, you will try to look for alpha generation.
'A good hedge fund manager is going to be able to generate some alpha,' Sels told reporters at a recent briefing.
HSBC has a list of selected hedge funds, and fund of hedge funds products that it recommends to clients. Sels said it is largely recommending macro and equity long and short funds in Asia.
UBS, meanwhile, likes relative value and market neutral strategies within hedge funds.
The Swiss giant estimates that funds of hedge funds will deliver around 5% in annual returns to investors.
Risk parity funds, on the other hand, are expected to return around 7% a year. 'Although the fall in bond yields hurts such funds' prospects, the commensurate drop in interest rate expectations also leads to lower borrowing costs.
'It is also worth noting that the difference between expected equity returns and borrowing costs has risen over the past year,' its chief investment office noted.
On the whole, UBS expects returns of 8%-10% in private markets, higher than in public markets, due to the effects of illiquidity premiums, manager skill, and greater access to niche opportunities.
Sels said hedge funds would also be better at market timing than a typical retail investor. 'Sometimes retail investors panic when the market sells off, and hedge fund investors... are going to take that as an opportunity to enter the market.
'In terms of the bond markets, they tend to be able to generate positive returns if markets fall,' he added.
Asia attracted $1.7 billion in hedge fund investments last September, bringing the year-to-date inflows to $430 million that month.