February 18, 2014

Institutional Investors Flock to Hedge Funds: Deutsche Bank Survey

January loss is unlikely to dampen hedge fund investors’ appetite

Hedge funds kicked off the new year on a sour note, losing 0.2% in January, according to the Hennessee Group.

This one-month downturn seemed unlikely to dampen investors’ enthusiasm for hedge funds, however, as Deutsche Bank reported Tuesday that investors in its annual alternative investment survey were bullish on industry growth.

Deutsche predicted that hedge fund assets would pass the $3 trillion mark by year-end, based on investors’ predictions of $171 billion net inflows and performance-related gains of 7.3%, amounting to $191 billion.

Institutional Allocations Increase

The Deutsche Bank survey included asset managers, public and private pensions, endowments and foundations, insurance companies, funds of funds, private banks, investment consultants and family offices from 29 countries. Forty-six percent of responding investors had $1 billion or more in hedge fund assets under management, and 18% had more than $5 billion.

The survey found that nearly half of institutional investors, which account for two-thirds of industry assets (compared with about one-third before the financial crisis), had increased their hedge fund allocations in 2013, and that 57% planned to do so this year.

Eighty percent of respondents said hedge funds had performed as well as expected or better in 2013, returning a weighted average of 9.3%, according to Deutsche.

In 2014, 63% of all respondents and 79% of institutional investors were targeting hedge fund returns of less than 10%. They mainly favored equity long/short and event-driven strategies.

Average management and performance fees have come down somewhat from the standard “2 & 20,” to 1.7% and 18.2%, but nearly half of investors said they would pay higher fees to a manager who had proven “consistent strong performance in absolute terms.”

Thirty-nine percent of investors said they were now embracing a risk-based approach to asset allocation, up from 25% in 2013. Deutsche noted that 41% of pension consultants recommended this approach to clients.

It said the risk-based approach effectively removed 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.

‘Spooked’ Global Markets

Charles Gradante, Hennessee Group’s co-founder, said Tuesday in a statement that the overall 0.2% decline in the Hennessee Hedge Fund Index was brought on by the loss of 2.3% in the global/macro subindex.

“Chairwoman Janet Yellen is on a rocket ship with no windows as tapering in the U.S. led to widening credit spreads and rising interest rates in emerging markets which spooked global equity markets causing a flight to safety as emerging markets and their currencies became less attractive,” Gradante said.

Hedge funds in January outperformed the S&P 500 Index, which was down 3.5%. Bonds recorded gains, with the Barclays Aggregate Bond Index up 1.5%.

Following are performance results for various Hennessee Group subindexes:

  • Long/short equity gained 0.8% in January
  • Arbitrage/event driven rose 0.6%
  • International fell 3.7%
  • Emerging markets slipped 1.5%
  • Fixed income gained 0.2%
  • Market neutral was up 0.8%

 

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