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Hedge fund industry increasingly optimistic about 2011

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Hedge fund managers and investors are increasingly bullish about the industry’s prospects for growth and returns in 2011, according to a survey by Barclays Capital conducted at the firm’s inaugural Hedge Fund Symposium in New York.

"The investment environment for hedge funds is much better than it was 24 months ago," says Ajay Nagpal, Head of Prime Services at Barclays Capital. "The results of our survey, combined with comments from both hedge fund managers and investors show considerable positive momentum in the hedge fund industry."

Accrding to the survey, two thirds of managers expect to deliver gross returns of 10-15%, while 30% expect to deliver outsized returns of 15% or higher. A majority of managers (56%) plan to maintain current leverage levels, while 33% plan to increase it. In addition, more than half (60%) of the surveyed managers reported plans to increase headcount in 2011, with a focus on investment personnel, while two thirds of managers plan to launch new products in 2011, with almost half (45%) of new launches expected to focus on emerging markets; global macro, equity long/short and multi-strategy were the least popular areas for new product launches.  Managers also expect the most attractive investment opportunities in 2011 to be in North America (39% of responses) and Asia Ex-Japan (35%)

The polled investors also reported optimism about the industry with 49% of planning to increase their allocations to hedge funds in 2011, with endowments and foundations, and insurance funds the most likely to increase their allocations (82% in the case of endowments and foundations and 64% in the case of insurance funds). The majority of respondents from endowments and foundations, private banks and insurance funds also reported planning to increase the number of managers they allocate to, while a majority of pension funds respondents planned to maintain the number of managers to which they allocate.

Insurance funds look likely to start investing more directly to individual hedge funds, with 43% reporting they planned to decrease their allocations to funds of hedge funds (FoHFs), and if current trends continue, small and emerging managers can expect a sanguine outlook for 2011 – over the past two years, more than one third of investors have allocated to managers with less than USD100 million in AUM.

More than one-third of investors – mostly FoHFs – have invested in managers with less than a one-year track record; another 40% said they require only one to three years’ track record and investors appear most interested in adding allocations to Event Driven strategies (67% of Investors), Emerging Markets (50%), Global Macro (54%), and Equity L/S (51%)

In spite of the increased optimism, hedge fund managers and investors attending our Symposium reported that they are still wary of a number of uncertainties ahead," says Louis Molinari, Head of Capital Solutions in Prime Services at Barclays Capital. "Top of mind for our respondents included regulation, inflation and deflation risks, the changing importance and possible overheating of emerging markets, and the continuing economic uncertainties facing the developed world."

The 275 investors surveyed at the symposium represent USD880 billion of hedge fund assets under management (AUM), while the 200 hedge fund managers surveyed represent USD225 billion in AUM.  The two day symposium, held in New York in October, was attended by senior international hedge fund investors and managers.

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