Growth ahead for the hedge fund industry
03 March 2015 Frankfurt
Image: Shutterstock
The hedge fund industry is set to surpass the $3 trillion mark by the end of 2015, according to Deutsche Bank’s annual alternative investment survey.
The survey aims to identify hedge fund sentiment and allocation trends for the year, with 435 hedge fund investors taking part, representing more than $1.8 trillion in hedge fund assets under management.
According to the survey, institutional investment in hedge funds is set to increase, with 39 percent of participants planning to increase their allocation in hedge funds. This led to a prediction of 7 percent growth in industry assets, passing $3 trillion by the end of the year.
Manager selection is also likely to become more of a priority, as the gap between underperforming and outperforming hedge funds widens. While the average hedge fund returned around 3.3 percent in 2014, the top five percent generated returns of 22 percent or more.
About 40 percent of respondents now co-invest with hedge fund managers in order to enhance returns and increase exposure to a manager’s best ideas. Of these, 72 percent plan to increase their allocation in 2015.
Investors are also moving towards steady and predictable risk-adjusted returns, with risk and return expectations for traditional products declining. Only 14 percent of survey participants said they would still target returns of more than 10 percent for a hedge fund portfolio, compared to 37 percent in last year’s survey.
One-in-three respondents plan to increase their allocation to quantitative strategies, with the three most popular strategies emerging as commodity trading advisor, quant equity and quant equity market neutral.
The survey also highlighted an increased interest in opportunities in Asia, with 30 percent of hedge fund respondents planning to increase investments in the Asian markets in the next 12 months. This has increased from 19 percent in 2014.
A quarter of investment respondents said they see opportunity in China, an increase from 11 percent last year. India is expected to emerge as a key beneficiary of flows, with 26 percent of investors planning to increase exposure to the region, compared to only 4 percent in the 2014 survey.
It also appeared that large intermediaries in the market are playing an increasingly important role, and large, well-resourced players are seeing strong demand from institutional investors.
According to the survey, 13 percent of funds-of-funds respondents are responsible for managing 55 percent of the total funds-of-funds assets in the market, while 28 percent of investment consultants account for the management and advice for 89 percent of total hedge fund assets in the investor segment.
Barry Bausano, co-head of global prime finance at Deutsche Bank, said: “As institutional investors’ needs continue to evolve, they are increasingly looking to work with larger hedge fund managers and intermediaries who can meet their appetite for comprehensive portfolio solutions.”
He added: “More and more, we’re seeing today’s hedge fund assets concentrated among the largest managers.”
The survey was conducted by Deutsche Bank’s global prime finance business. Respondents were from 26 different countries, and included asset managers, public and private pensions, endowments and foundations, insurance companies, funds of funds, private banks, investment consultants and family offices.
About half of the responding investors manage more than $1 billion in assets under management, and 20 percent manage more than $5 billion.
Murray Roos, co-head of global prime finance at Deutsche Bank commented: “Hedge fund managers who continue to focus on alignment of interests with the allocator community will have an increasingly competitive advantage as our industry grows and evolves.”
He added: “Reward for alpha generation and co-investment opportunities will be key factors in building strong partnerships between limited partnerships and general partnerships.”
The survey aims to identify hedge fund sentiment and allocation trends for the year, with 435 hedge fund investors taking part, representing more than $1.8 trillion in hedge fund assets under management.
According to the survey, institutional investment in hedge funds is set to increase, with 39 percent of participants planning to increase their allocation in hedge funds. This led to a prediction of 7 percent growth in industry assets, passing $3 trillion by the end of the year.
Manager selection is also likely to become more of a priority, as the gap between underperforming and outperforming hedge funds widens. While the average hedge fund returned around 3.3 percent in 2014, the top five percent generated returns of 22 percent or more.
About 40 percent of respondents now co-invest with hedge fund managers in order to enhance returns and increase exposure to a manager’s best ideas. Of these, 72 percent plan to increase their allocation in 2015.
Investors are also moving towards steady and predictable risk-adjusted returns, with risk and return expectations for traditional products declining. Only 14 percent of survey participants said they would still target returns of more than 10 percent for a hedge fund portfolio, compared to 37 percent in last year’s survey.
One-in-three respondents plan to increase their allocation to quantitative strategies, with the three most popular strategies emerging as commodity trading advisor, quant equity and quant equity market neutral.
The survey also highlighted an increased interest in opportunities in Asia, with 30 percent of hedge fund respondents planning to increase investments in the Asian markets in the next 12 months. This has increased from 19 percent in 2014.
A quarter of investment respondents said they see opportunity in China, an increase from 11 percent last year. India is expected to emerge as a key beneficiary of flows, with 26 percent of investors planning to increase exposure to the region, compared to only 4 percent in the 2014 survey.
It also appeared that large intermediaries in the market are playing an increasingly important role, and large, well-resourced players are seeing strong demand from institutional investors.
According to the survey, 13 percent of funds-of-funds respondents are responsible for managing 55 percent of the total funds-of-funds assets in the market, while 28 percent of investment consultants account for the management and advice for 89 percent of total hedge fund assets in the investor segment.
Barry Bausano, co-head of global prime finance at Deutsche Bank, said: “As institutional investors’ needs continue to evolve, they are increasingly looking to work with larger hedge fund managers and intermediaries who can meet their appetite for comprehensive portfolio solutions.”
He added: “More and more, we’re seeing today’s hedge fund assets concentrated among the largest managers.”
The survey was conducted by Deutsche Bank’s global prime finance business. Respondents were from 26 different countries, and included asset managers, public and private pensions, endowments and foundations, insurance companies, funds of funds, private banks, investment consultants and family offices.
About half of the responding investors manage more than $1 billion in assets under management, and 20 percent manage more than $5 billion.
Murray Roos, co-head of global prime finance at Deutsche Bank commented: “Hedge fund managers who continue to focus on alignment of interests with the allocator community will have an increasingly competitive advantage as our industry grows and evolves.”
He added: “Reward for alpha generation and co-investment opportunities will be key factors in building strong partnerships between limited partnerships and general partnerships.”
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