Hedge fund assets will grow at a 7% clip in 2014, surpassing $3 trillion by year-end, according to a Deutsche Bank survey released Tuesday.
The study found that 39% of institutional investors planned to increase their allocation to hedge funds this year.
Deutsche polled 435 hedge funds investors from 26 countries, representing $1.8 trillion in assets under management, of which about half of respondents managed more than $1 billion and a fifth more than $5 billion.
Firm size matters. Since 2008, the survey found, assets managed by $5 billion-and-larger firms grew by 141%, compared with 53% for those with less than $5 billion.
At present, 200 firms at most account for more than two-thirds of industry assets.
Manager skill is also critical as the gap between top performers and laggards widens. In 2014, the top fifth percentile of hedge funds returned more than 22%, compared with the average hedge fund return of 3.3%.
Investors told researchers they were looking for steady and predictable risk-adjusted returns — a sentiment reflected in other research. Only 14% said they still targeted returns of more than 10%, compared with 37% that did so a year ago.
At the same time, 40% of respondents said they now co-invested with hedge fund managers in order to increase their exposure to a manager’s best ideas.
Seventy-two percent of these investors said they would increase their allocation in 2015.