Hedge funds to reach USD3trn by year end 2014
Hedge funds are expected to reach a record breaking USD3trn by year end 2014, up from USD2.6trn as of 2013 year end, according to Deutsche Bank’s 12th annual Alternative Investor Survey.
This is based on investors' predictions of USD171bn net inflows and performance-related gains of 7.3 per cent (representing USD191bn).
Over 400 investor entities participated in this year’s survey, representing over USD1.8trn in hedge fund assets and over two thirds of the entire market by assets under management (AuM).
According to the survey, nearly half of institutional investors increased their hedge fund allocations in 2013, and 57 per cent plan to grow their allocations in 2014. Institutional investors now account for two thirds of industry assets, compared to approximately one third pre-crisis.
Some 80 per cent of respondents state that hedge funds performed as expected or better in 2013, after their allocations returned a weighted average of 9.3 per cent in 2013. Sixty three per cent of respondents, and 79 per cent of institutional investors, are targeting returns of less than 10 per cent for their hedge fund portfolios in 2014. Equity long short and event driven are the most sought after strategies.
Investors today pay an average management fee of 1.7 per cent, and an average performance fee of 18.2 per cent. While fees have come down slightly, investors remain willing to pay for performance: almost half of all investors would allocate to a manager with fees in excess of 2&20 where the manager has proven 'consistent strong performance in absolute terms'.
A total of 39 per cent of investors are now embracing a risk-based approach to asset allocation, up from 25 per cent in 2013. Some 41 per cent of pension consultants recommend this approach to clients. The risk-based approach effectively removes historical constraints on the percentage allocation to absolute return strategies, allowing equity long/short managers to compete with long only and fixed income absolute return funds within the overall fixed income risk budget.
Conducted by Deutsche Bank's global prime finance business, the survey identifies trends amongst a growing and evolving hedge fund investor base. Respondents include asset managers, public and private pensions, endowments and foundations, insurance companies, fund of funds, private banks, investment consultants and family offices.
Allocators from 29 different countries completed the survey. Approximately half (46 per cent) of responding investors manage USD1bn+ in hedge fund AuM, and 18 per cent manage over USD5bn.
Barry Bausano, co-head of global prime finance at Deutsche Bank, says: "Hedge funds continue to establish their growing position within the broader asset management industry, alongside some of the more mainstream asset managers. The hedge fund industry is predicted to reach a record USD3trn by 2014 year end driven by significant inflows, most notably from institutional investors."
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