Hedge fund investors are optimistic in their outlook for the industry in 2018, expecting hedge funds to receive USD41 billion in net new investor capital for the year versus USD10 billion last year.
That’s according to Deutsche Bank’s 16th annual Alternative Investment Survey, which polled the views of 436 global hedge fund investors, representing 2.1 trillion US dollars in hedge fund assets, on their current sentiment and allocation plans for 2018.
The hedge fund industry grew by 6.4 per cent in 2017 and assets under management reached an all-time high of USD3.21 trillion by year-end, surpassing the USD3.14 trillion predicted by investors in last year’s survey.
“It has been a transitional time for the hedge fund industry. We are seeing a shift in momentum with improved performance and positive flows,” says Greg Bunn, Global Co-head of Prime Finance at Deutsche Bank. “One in every two investors plans to grow their allocation to hedge funds in the next 12 months. We found that the average respondent expects to boost the size of their portfolio by USD129 million this year.”
Investors from 21 different countries across the EMEA, Americas and Asia Pacific regions, representing two thirds of industry assets, completed the survey. Compiled by Deutsche Bank’s Capital Introduction Group, the survey is one of the most comprehensive in the industry, focused on pension funds, sovereign wealth funds, endowments, foundations, insurance companies, consultants and funds of hedge funds.
Marlin Naidoo (pictured), Global Head of Capital Introduction and Hedge Fund Consulting at Deutsche Bank, says: “While investors are committing more capital to hedge funds as part of their overall portfolio, the competition for these dollars remains strong. This is because most investors expect to keep their number of allocations constant, creating a “one in, one out” scenario. Fund managers need to continue to differentiate themselves via outperformance, bespoke fee arrangements and uncorrelated investment strategies.”
The context in which investors responded to the survey was after a strong year for risk assets globally. Many equity indices ended the year at or close to multi year highs. In addition, the hedge fund industry ended the year up high single digits, posting the best annual performance since 2013.
Ashley Wilson, Global Co-Head of Prime Finance and EMEA Head of Equity Trading at Deutsche Bank, said: “Investors appear more optimistic in their outlook for Europe and Asia. Our survey indicates that investor interest in European hedge funds has more than doubled year on year and that thirty per cent of respondents are planning to add exposure to Asia. These regions provide more alpha opportunities across multiple countries with diverse market structures.”
Respondents’ hedge fund portfolios broadly met their 2017 return targets, representing the first year that investors achieved their set targets in 4 years. The average respondent’s portfolio achieved a year to date return of +7.97 per cent as of 30 November 2017, compared to +2.99 per cent the prior year.
Event driven funds received USD6.9 billion of net inflows in Q4 2017, representing the largest increase in net new capital of all broad based strategies quarter on quarter. Twenty-two per cent of investors are planning to allocate to event driven managers over the next twelve months (versus 10 per cent last year), making it the most sought after strategy in 2018.
One in five respondents is planning to add to fundamental equity long/short funds in 2018, making it the second most in-demand strategy for the year ahead. This result comes in stark contrast to our findings last year where only 4 per cent of respondents were looking to add to fundamental equity long/short.
Environmental, social and governance (ESG) funds see a meaningful increase in demand. One in every five respondents currently allocates to socially responsible/environmental, social and governance (ESG) investments, up from 13 per cent last year. Of these respondents, two-thirds (67 per cent) are looking to increase their allocation to ESG funds in 2018.
Western Europe has displaced North America as the most sought after investment region, with 37 per cent of investors planning to add to their European exposure in 2018 (versus 17 per cent in last year’s survey). Asia is close behind: 30 per cent plan to add to Asia including Japan (up from 21 per cent last year)
Results suggest that hedge fund fee arrangements are becoming increasingly dynamic and based on a variety of different factors, such as fund AUM, age and strategy as well as the nature of the investment. For example, half of investors have negotiated lower fees for a longer lock up or larger allocation size, while 42 per cent of respondents are invested in a fund whose management fee reduces as assets under management increase.
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