Hedge fund investors are feeling optimistic about 2016, expecting hedge funds to outperform equity markets, Deutsche Bank reported Tuesday in announcing highlights of its latest alternative investment survey.
In January, hedge funds staggered to their worst loss in nearly four years, but it is still early days.
Forty-one percent of respondents said they planned to increase their hedge fund allocations during the year, and assets were expected to grow by approximately 5%, passing the $3 trillion mark, the report said.
DB surveyed 504 global hedge fund investors, representing $2.1 trillion in hedge fund assets, on their current sentiment and allocation plans for 2016.
Even though management and performance fees have edged downward, investors will pay for quality, according to the survey.
The average management fee remained unchanged year on year at 1.6%, while the average performance fee has fallen from 18.03% to 17.85%.
However, 42% of respondents said they would allocate to a manager with fees in excess of the traditional “2 and 20” for a new allocation.
The study found pension funds’ allocations to hedge funds trending upward. The average pension fund had an 8% allocation to hedge funds, up from 7% in 2015.
In addition, 71% of pension fund respondents said they had used an investment consultant, compared with just 15% in 2010.
The bank noted that this trend was contributing to a change in pension funds’ portfolio allocation tactics, including a more scientific focus on alpha versus beta and greater demands around operational excellence.
Some two-thirds of respondents said their top quartile of hedge funds had returned, on average, 10% or more in 2015, while nearly half reported that their bottom quartile of hedge funds had lost 5% or more on average for the year.
Preqin, the alternatives data provider, reported that its all-strategies hedge fund benchmark recorded gains of 2% last year, compared with 4.7% in 2014.
According to the DB report, selecting the right hedge funds — those with a unique skill set, competitive advantage and true alpha proposition — was increasingly critical for investors.
“Investors are becoming increasingly sophisticated in constructing their hedge fund portfolios,” Anita Nemes, the firm’s global head of capital introduction, said in a statement.
“The return dispersion seen in 2015 means that choosing the right manager and constructing the right portfolio is ever more. Investors are concentrating and redesigning their portfolios in search of less correlated, diversified return streams.”