Could hedge fund net inflows triple this year?

Investors may almost triple the amount of capital they put into hedge funds this year, an annual survey by Deutsche Bank AG showed.

Feb 18, 2014 @ 11:58 am

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Investors may almost triple the amount of capital they put into hedge funds this year, boosting industry assets to a record, an annual survey by Deutsche Bank AG showed.

Hedge funds may attract $171 billion of net inflows and generate $191 billion in performance-related gains, according to 413 investors globally polled by the German bank in December. The investors have with $1.8 trillion of assets in hedge funds. The combined effect will help boost assets by 14% to $3 trillion by year-end, the survey showed. Last year, the industry drew $63.7 billion of net deposits, according to Hedge Fund Research Inc.

The increase in allocations predicted would be the largest into hedge funds since 2007, based on data from HFR. The optimism follows the best industry return in three years and the growing trend of investors folding hedge funds into their stock or fixed-income allocations, the survey said.

“With the majority of investors happy with hedge-fund performance, we expect institutional investors to further strengthen their commitment to hedge funds,” Anita Nemes, global head of the Deutsche Bank's hedge-fund capital group, wrote in an e-mailed statement.

Eighty percent of investors in this year's survey said hedge funds met or exceeded their performance expectations for 2013. Their hedge-fund investments returned 9.3 percent on a weighted-average basis last year, beating the 9.2% target in the previous year's survey.

Global hedge funds had $2.6 trillion in 2013, according to HFR. Investors in the Deutsche Bank survey are targeting a 9.4% return for this year.

Forty-seven percent of the investors increased their hedge-fund assets in 2013, while 62 percent plan to do so this year, according to the survey. Investors have diversified holdings to weather the low-yielding and uncertain market environment after the 2008 global financial crisis, it said.

Thirty-nine percent of the investors in the survey now allocate to stock-focused hedge funds as part of their equity investments and credit-focused strategies as part of fixed-income holdings, the survey showed. That was a 14 percentage point increase from last year's survey.

“This means investors are effectively removing percentage allocation constraints to hedge-fund strategies, enabling significant growth potential for alternatives within their portfolios,” Angharad Fitzwilliams, director of Deutsche Bank's hedge-fund capital group, wrote in an e-mail.

The percentage of investors holding hedge-fund assets in a separate “alternatives” bucket fell to 50%, from 56% last year, according to the survey.

Institutions such as pensions, endowments, foundations and insurers now account for two-thirds of industry assets, rising from a third before the 2008 crisis, it showed. Almost half of the institutions in the survey increased allocations to hedge funds last year and 57% plan to expand such assets in 2014, according to the survey.

Funds betting on rising and falling stocks, and those that seek to profit from corporate events such as mergers are the most-sought-after strategies this year, with more than 50 percent of investors indicating they would add to such funds, according to the survey. Global macro, a strategy that seeks to profit from economic trends, ranked third.

“With the end of quantitative easing and an unexpected increase in volatility and dispersion, 2014 may prove to be more of a stock picker's market,” Mr. Fitzwilliams said. “Investors believe economic fundamentals, as opposed to political rhetoric, are going to have a greater influence on global asset prices over the next 12 months.”

Regionally, 29% of all investors in the survey plan to increase allocations to Japan this year, trailing only Western Europe and ahead of North America.

Europe's largest investment bank by revenue started the annual survey in 2002. The latest edition polled investors including pensions, endowments, investment consultants, funds of funds, family offices and private banks.

(Bloomberg News)

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