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Investors Increasingly Keen On Hedge Funds - Deutsche Survey

Sandra Kilhof

20 February 2014

Hedge funds are playing an increasingly larger role in the asset management industry, as strong performance continues to reign in investors, reveals a new survey by on the alternative investment industry. The study, which surveyed over 400 hedge fund investor entities, revealed that the hedge fund industry is set to reach record heights in 2014.

“Hedge funds continue to establish their growing position within the broader asset management industry, alongside some of the more mainstream asset managers. The hedge fund industry is predicted to reach a record $3 trillion by 2014 year end driven by significant inflows, most notably from institutional investors,” said Barry Bausano, co-head of global prime finance at Deutsche Bank.

As such, investors remain bullish on industry growth as the report stated predictions of $171 billion net inflows and performance-related gains of 7.3 per cent (representing $191 billion) in the coming year. Furthermore, commitment from institutional investors continues to strengthen – as nearly half of such investors increased their hedge fund allocations in 2013, and 57 per cent plan to grow their allocations in 2014. Consequently, institutional investors now account for two thirds of industry assets, compared to approximately one third pre-crisis, the report said.

Investors are therefore also increasingly happy with hedge fund performance, as 80 per cent of respondents said that hedge funds performed as expected or better in 2013, after their allocations returned a weighted average of 9.3 per cent in 2013. Based on this faith in hedge funds, 63 per cent of respondents, and 79 per cent of institutional investors, are targeting returns of less than 10 per cent for their hedge fund portfolios in 2014, with equity long short and event driven as the most sought after strategies.

“With the majority of investors happy with hedge fund performance, we expect institutional investors to further strengthen their commitment to hedge funds. Last year’s respondents targeted 9.2 per cent for their hedge fund portfolios, and hedge funds delivered. Looking forward, respondents are targeting 9.4 per cent for 2014,” explained Anita Nemes, global head of the hedge fund capital group at Deutsche Bank.

Furthermore, the report revealed that investors remain willing to pay for performance, as almost half of all investors would allocate to a manager with fees in excess of 2&20 where the manager has proven "consistent strong performance in absolute terms". This comes at a time when investors pay an average management fee of 1.7 per cent, and an average performance fee of 18.2 per cent.

The Deutsche Bank survey interviewed 400 investor entities across 29 different countries, representing over $1.8 trillion in hedge fund assets and over two thirds of the entire market by assets under management. Respondents include asset managers, public and private pensions, endowments and foundations, insurance companies, fund of funds, private banks, investment consultants and family offices.