Hedge funds may see 15% rise in assets by 2014-end: Deutsche Bank

Investors are bullish about the growth of the hedge fund industry. Hedge funds are expected to see assets touch $3 trillion (Rs 186 lakh crore) by the end of 2014, up from $2.6 trillion (Rs 161.20 lakh crore) as of 2013 end (up 15%). This is based on investors’ predictions hedge funds may attract $171 billion (Rs 10.60 crore) of net inflows and generate $191 billion (Rs 11.84 crore) in performance-related gains net inflows. This is according to Deutsche Bank's annual Alternative Investor Survey released today.

 

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.” 

 

This year over 400 investor entities participated in the survey, representing over $1.8 trillion (Rs 111.6 lakh crore) in hedge fund assets and over two-thirds of the entire market by assets under management (AUM). 

 

Anita Nemes, Global Head of the Hedge Fund Capital Group at Deutsche Bank, said, “Last year’s respondents targeted 9.20% for their hedge fund portfolios, and hedge funds delivered – the weighted average return for respondents’ hedge fund portfolios this year was 9.30%. Looking forward, respondents are targeting 9.40% for 2014.” 

 

Eighty% respondents state that hedge funds performed as expected or better in 2013, after their allocations returned a weighted average of 9.30% in 2013. 63% and 79% 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. 

 

The Alternative Investor Survey also said 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.

 

Investors today pay an average management fee of 1.70%, and an average performance fee of 18.20%. While fees have come down slightly, investors are willing to pay for performance. Almost half of the investors would allocate to a manager with fees in excess of 2 and 20 where the manager has proven ‘consistent strong performance in absolute terms’. This means that hedge funds charge 2% every year as fee and then, take an additional 20% of the profits of the fund in a given year.   

 

Around 39% investors are now embracing a risk-based approach to asset allocation, up from 25% in 2013. Some 41% 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%) the respondents manage more than $1 billion (Rs 6,200 crore) in hedge fund AUM, and 18% manage over $5 billion (Rs 31,000 crore).