Hedge funds are expected to outperform equity markets in 2016, according to Deutsche Bank’s 14th annual Alternative Investment Survey, Additionally, 41 per cent of respondents plan to increase their hedge fund allocations during the year.
The survey, which polled the views of 504 global hedge fund investors, representing USD 2.1 trillion in hedge fund assets, on their current sentiment and allocation plans for 2016, reveals industry assets are expected to grow approximately 5 per cent in 2016, surpassing USD3 trillion.
Pension funds’ allocations to hedge funds are trending upward year on year. The average pension fund has an 8 per cent allocation to hedge funds, up from 7 per cent last year.
Additionally, 71 per cent of pension fund respondents utilise an investment consultant, compared to just 15 per cent in 2010. This trend is contributing to a change in pension funds’ portfolio allocation tactics, including a more scientific focus on alpha versus beta and greater demands around operational excellence.
63 per cent of respondents indicated their top quartile of hedge funds produced, on average, +10.0 per cent or more in 2015. Meanwhile, almost half saw their bottom quartile of hedge funds lose, on average -5.0 per cent or more for the year. Selecting the right hedge funds – those with a unique skill set, competitive advantage and true alpha proposition – is increasingly critical for investors. The return dispersion witnessed in 2015 is expected to drive respondents’ portfolio changes in 2016.
Managers today are competing for a place amongst an average of 36 funds (median: 25) versus 60 (median: 45) in 2008. Due to a scarcity of alpha and capacity concerns, more investors are concentrating their portfolios in search of higher returns, reduced overall costs and greater portfolio efficiency.
Over two thirds of respondents invest in systematic strategies, including one in every two who plan to add to one or more quantitative sub-strategies in 2016. The largest investment consultants and pension funds are driving demand: 45 per cent of these respondents plan to add to one or more systematic strategies, including quantitative equity market neutral, CTA, quantantitive macro, quantitative equity and quantitative multi-strategy.
Those managers that have demonstrated their ability to deliver alpha on both the long and short side of the book irrespective of market directionality are well placed to benefit from increased investors flows. After a strong year of performance, equity market neutral strategies are expected to be amongst the best performers in 2016, and are also the most in-demand. On a net basis, 32 per cent of investors are increasing their exposure to fundamental equity market neutral (versus 17 per cent last year), and 18 per cent to systematic equity market neutral (versus 11 per cent last year).
20 per cent of respondents invest in alternative beta / risk premia strategies today, up from 15 per cent last year and 8 per cent the year prior. 60 per cent of these respondents plan to grow their allocation in 2016. We are seeing some investors complement their core ‘alpha’ portfolios with more liquid and cheaper alternative beta / risk premia strategies in order to allocate risk capital more dynamically and efficiently.
Multi-strategy and event driven strategies are amongst those strategies with the highest expected turnover in 2016. 16 per cent and 20 per cent of respondents plan to redeem from these strategies, respectively, while 9 per cent and 18 per cent plan to add. Additionally, 18 per cent plan to add to credit distressed to add and 17 per cent plan to reduce.
Management and performance fees have come down marginally, however investors will pay for quality. The average management fee that investors pay remains unchanged year on year at 1.63 per cent, whilst the average performance fee has trended downward slightly during this period from 18.03 per cent to 17.85 per cent. Despite continued headline pressure on fees, 42 per cent of investors say they would allocate to a manager with fees in excess of “2&20” for a new allocation.
As their expectations and requirements change, investors are increasingly looking to align themselves with strategic partners who have the experience, expertise and resources to help them manage their own portfolios, whether that is in the form of knowledge sharing and/or tailored strategies and products. More than two thirds of respondents placed “access to founders / CIOs / senior investment professionals” in their top three factors influencing the manager selection process. Additionally, one third of respondents today have utilised the single investment funds to create more tailored solutions. Lastly, demand for non-traditional hedge fund products is on the rise, with a growing number of investors allocating to alternative UCITS strategies, alternative ’40 Act mutual funds, hybrid PE/HF vehicles, hedge fund run long-only and co-investment opportunities.
“Despite a challenging year for global financial markets and for hedge funds, investors remain committed to their hedge fund programs, with 41 per cent planning to increase their hedge fund allocations in 2016,” says Ashley Wilson (pictured), Global Co-Head of Prime Finance at Deutsche Bank.
Greg Bunn, Global Co-Head of Prime Finance at Deutsche Bank, says: “We are seeing greater demand for tailored strategies and products that cater to investors’ changing needs and requirements. More investors are looking to increase their allocations to products such as alternative beta/risk premia strategies, liquid alternatives, hybrid private equity/hedge fund vehicles and co-investment opportunities.
“Investors are becoming increasingly sophisticated in constructing their hedge fund portfolios. The return dispersion seen in 2015 means that choosing the right manager and constructing the right portfolio is ever more critical, said Anita Nemes, Global Head of Capital Introduction at Deutsche Bank. “Investors are concentrating and redesigning their portfolios in search of less correlated, diversified return streams.”
