Hedge fund investors are overwhelmingly bearish about financial markets this year and fewer than half of them expect conditions to improve in 2009, according to a survey published by Deutsche Bank. The survey showed that 80 per cent of investors are bearish this year. As far as 2009 is concerned, 40 per cent expect the global economy to recover, leaving the remainder taking a bearish view or holding no view either way. More than 1,000 respondents from 500 institutions responded to this year’s survey, including banks, corporations, insurance companies, consultants, family offices, high net worth individuals, wealth management companies, funds of funds, pensions, endowments and foundations. Elsewhere, the survey – the sixth of its kind that Deutsche Bank has carried out – showed that for the first time in the report’s history, investors added risk management as an important factor in selecting hedge fund managers, in addition to other established criteria such as investment performance and a manager’s track record. The addition of risk management as a key management selection test shows how the volatility and heavy losses incurred by some hedge funds over recent months has turned the spotlight on to this vital financial discipline. Following the credit crunch and market volatility, cash levels are high as investors wait to see if market conditions will improve. More than 30 per cent of the survey’s respondents are holding cash. However, the survey found that 53 per cent of investors who hold cash plan to eliminate their cash holdings over the 12 months, suggesting a renewed desire to allocate to cash funds over the coming year. Most of the investors polled said they planned to raise their exposure to emerging markets and the Middle East region is forecast to be the strongest performing region., Investors also expect that macro, distressed and equity volatility will be the strongest performing hedge funds strategies this year. Some 70 per cent of investors said they did not use or apply leverage to their portfolios, while 30 per cent do so. The respondents said they expected inflows to hedge funds to surpass $200 billion this year.