Close to three quarters of investors expect their hedge fund portfolios to perform better in 2017 versus 2016, according to Deutsche Bank’s 15th annual Alternative Investment Survey.
Performance-based gains are expected to drive industry assets to reach USD3.14 trillion by year-end, says Deutsche Bank’s poll of 460 hedge fund investors representing almost USD2 trillion in hedge fund assets.
The survey reveals that 2016 marked another year in which significant return dispersion shaped hedge fund performance. On average, investors’ top quartile funds returned 11.22 per cent in 2016, while respondents’ bottom quartile managers were down 6.86 per cent.
Manager selection has become of crucial importance in the success of a hedge fund portfolio, and investors are increasingly diverting capital to a smaller number of consistent alpha generators.
The topic of fees has also moved to the forefront of investors’ minds, and is playing a critical role in allocation decisions. The average management fee and performance fee that investors pay for their typical hedge fund investment is 1.59 per cent and 17.69 per cent, respectively. Three quarters of respondents negotiate fees with their managers, led by pension funds. Investors are not only focused on securing lower fees, but also on creating fee structures that are better aligned with their portfolio needs. Hurdle rates, as well as management fees that scale down as assets grow, are highly sought after by investors.
The number of investors investing in quantitative strategies continues to grow: 79 per cent of all respondents allocate to systematic strategies, up from 70 per cent last year. Furthermore, close to half of survey respondents plan to increase their allocation in 2017. Survey results also suggest that investors are embracing a wider variety of quantitative strategies. Five of the top 10 most in-demand strategies are systematic, whereas there were only three in the top ten in last year’s survey.
Discretionary macro is the most sought after strategy by survey respondents this year. On a net basis, 27 per cent of investors plan to increase their exposure to discretionary macro over the next twelve months. Investor appetite for quant macro has also increased significantly year on year with this strategy moving up the ranks from 12th place last year to third place this year.
The percentage of survey respondents who allocate to alternative beta/risk premia strategies has increased to 26 per cent, up from 20 per cent last year and 15 per cent the year prior. Pension funds are driving this trend: almost half of all pension fund respondents are allocating to alternative beta/risk premia solutions today, nearly double the proportion observed in last year’s survey.
“Despite another challenging year for hedge funds in 2016, investors remain committed. We found that over three quarters of investors plan to grow or maintain their allocations to hedge funds in 2017,” says Anita Nemes (pictured), global head of hedge fund capital group at Deutsche Bank. “However, to become and remain part of an institutional hedge fund portfolio is ever more difficult. These investors not only demand better risk-adjusted returns but are increasingly calling for partnership, innovative and bespoke portfolio solutions and better aligned fee structures and terms.”
Marlin Naidoo, Americas head of hedge fund capital group, says: “The rise of quant is accelerating with 79 per cent of investors allocating to the space. The number of strategies available has been growing and now range from simple low fee alternative risk premia products to more complex high alpha products that have seen further enhancements due to the advances in areas such as machine learning, quantum computing and the cloud. This has contributed to the additional interest and demand.”
