Hedge fund investors expect continued growth in 2013, and are predicting alternative investment industry AUM to reach an all time high of USD2.5trn by year end with net inflows of USD123bn, according to the 11th Deutsche Bank Alternative Investor Survey.
The survey of over 300 investor entities around the world, who manage more than USD1.2trn in assets found that hedge funds are no longer a stand-alone asset class. Institutional investors have moved from a traditional asset class allocation to a risk-based approach. A quarter of institutional investors have adopted this approach and half of consultants recommend it to clients.
Investors now expect steady, predictable return streams. Two thirds of investors feel that hedge funds have performed as expected or better in 2012. For 2013, 65 per cent of investors and 79 per cent of institutional investors are targeting returns of five to 10 per cent from hedge funds.
Successful fee negotiation involves compromise, whilst investors commit to top performing managers. Almost 80 per cent of investors pay an average management fee of 1.5 to two per cent and three quarters pay 17.5 to 20 per cent for performance. Only 29 per cent of investors who negotiate fees are successful more than half of the time.
Institutional investors dominate hedge fund AUM. Whilst 57 per cent of private banks decreased hedge fund AUM, almost 70 per cent of pension funds increased their allocations. Almost half of pension funds expect to increase allocations by USD100m or more in 2013.
The demise of fund of funds has been exaggerated, with evolved business models attracting institutional capital. 29 per cent state that over half of new business in 2012 was for bespoke portfolios, whilst 58 per cent of end-allocators state the main benefit of fund of fund allocations is to access niche managers, including smaller or younger funds.
The survey, conducted by Deutsche Bank’s markets prime finance business, identifies the evolution of hedge fund investing brought on by new investor expectations. Respondents include public and private pensions, foundations and endowments, funds of funds, private banks, investment consultants and family offices.
Over half of the investors surveyed individually manage and/or advise over USD1bn in hedge fund assets, with 10 percent managing USD10bn or more.
Barry Bausano, global co-head of prime finance at Deutsche Bank, says: “The hedge fund industry is experiencing an ongoing evolution as investor expectations and manager returns more closely align. Our 2012 survey closely predicted hedge fund asset growth for the year. In 2013 investors predict increased growth of 11 per cent, with assets reaching USD2.5trn by year end.”
Anita Nemes, global head of capital introduction at Deutsche Bank, says: “Investors are increasingly looking for steady and consistent returns as they balance portfolios according to a risk based rather than asset class approach. Top performing managers continue to dominate, but besides performance, aligning interests with those of the investor is also critical in order to win attention from an increasingly institutional investor base.”