Customisation and co-investments gather pace, Deutsche Bank survey finds

Deutsche Bank

The global hedge fund industry’s shift towards greater customisation and bespoke products is rapidly gathering momentum, as allocators pile into managed accounts and sector- or country-specific strategies, with ESG concerns also increasingly to the fore, according to a new industry study published by Deutsche Bank.

Deutsche’s 18th annual Alternative Investment Survey - which takes the temperature of hedge fund investor sentiment and gauges future asset allocation plans - suggests investors are keen to grow their investments following strong performance in 2019.

But the bank also concedes that since the research was conducted last month, the recent economic turmoil over the Covid-19 pandemic has potentially thrown investment plans into disarray.

“It is likely that investors allocation plans may shift, in which case the survey results would be a good data source to show the change in investor sentiment, as we navigate through the coronavirus crisis,” Deutsche Bank said.

The study – which polled 255 allocators investing or advising on a total of USD1.33 trillion in hedge fund assets, or 40 per cent of total global AUM – found almost a third (31 per cent) of hedge fund investors now have customised mandates, which account for some 9 per cent of their assets on average. That number is tipped to swell to 43 per cent in the next five years.

Some 38 per cent of respondents currently have co-investments, up from 32 per cent the previous year, with a further 18 per cent considering them this year.

The findings chime with broader industry sentiment that points to an evolving relationship between hedge fund managers and investors, as the balance of power shifts decisively in favour of allocators who want a greater degree of control over their investments.

The study noted that the average hedge fund gained 10.38 per cent last year, with global industry-wide AUM reaching a peak of USD3.32 trillion, up from USD3.24 trillion in 2018. This asset growth was primarily performance-driven, since the industry saw estimated net capital outflows of around USD43 billion annually in 2019. Respondents’ hedge fund portfolios gained 8.97 per cent on average last year, outstripping annual return targets of 8.49 per cent.

As a result, some 53 per cent of those polled plan to grow their hedge fund allocations this year – with discretionary macro, healthcare equity long/short, and China equity long/short the strategies most in demand, reflecting the surging appetite for sector- and country-specific funds. On the flipside, survey data indicates that alternative risk premia strategies are likely to come under pressure.

Of those investors planning to slash their hedge fund assets, 30 per cent are shifting capital from hedge funds into private equity, while 20 per cent intend to head towards private credit.

Elsewhere, close to two-thirds (60 per cent) of investors report that environmental, social and governance (ESG) factors now shape their allocation decisions. Of that number, almost a fifth (18 per cent) of respondents invested with managers as a result of ESG factors, while 5 per cent redeemed due to such factors.

This is expected to significantly increase in the coming years with 41 per cent expected to allocate in 2020 and 67 per cent in 2025, while 33 per cent are expecting to redeem by 2025.