The hedge fund industry is predicted to reach a record $3 trillion by 2014 year end -up from $2.6tn as of 2013 year end-, driven by significant inflows, most notably from institutional investors, according to a recent study by Deutsche Bank. This is based on investors’ predictions of $171 billion net inflows and performance-related gains of 7.3% (representing $191 billion).
The bank has released its twelfth annual Alternative Investor Survey, which stands as one of the largest and longest standing hedge fund investor surveys available. This year over 400 investor entities participated, representing over $1.8 trillion in hedge fund assets and over two thirds of the entire market by assets under management (AuM).
Barry Bausano, Co-head of Global Prime Finance at Deutsche Bank, said: “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.”
According to the survey, commitment from institutional investors continues to strengthen: nearly half of institutional investors increased their hedge fund allocations in 2013, and 57% plan to grow their allocations in 2014. Institutional investors now account for two thirds of industry assets, compared to approximately one third pre-crisis.
Anita Nemes, Global Head of the Hedge Fund Capital Group at Deutsche Bank, said: “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% for their hedge fund portfolios, and hedge funds delivered – the weighted average return for respondents’ hedge fund portfolios this year was 9.3%. Looking forward, respondents are targeting 9.4% for 2014.”
Investors are happy with hedge fund performance: 80% of respondents state that hedge funds performed as expected or better in 2013, after their allocations returned a weighted average of 9.3% in 2013. 63% of respondents, and 79% of institutional investors, are targeting returns of less than 10% for their hedge fund portfolios in 2014. Equity long short and event driven are the most sought after strategies.
About the fee trends, the study says 2 & 20 is not the norm. Investors today pay an average management fee of 1.7%, and an average performance fee of 18.2%. While fees have come down slightly, investors remain willing to pay for performance: 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’.
The industry will have a bigger part of a bigger pie. 39% of investors are now embracing a risk-based approach to asset allocation, up from 25% in 2013. 41% of pension consultants recommend this approach to clients. The risk-based approach effectively removes historical constraints on the percentage allocation to absolute return strategies, allowing equity long/short managers to compete with long only and fixed income absolute return funds within the overall fixed income risk budget.
Conducted by Deutsche Bank’s Global Prime Finance business, the survey identifies trends amongst a growing and evolving hedge fund investor base. Respondents include asset managers, public and private pensions, endowments and foundations, insurance companies, fund of funds, private banks, investment consultants and family offices. Allocators from 29 different countries completed the survey. Approximately half (46%) of responding investors manage $1bn+ in hedge fund AuM, and 18% manage over $5bn.