Hedge fund industry assets are set to rise above $3 trillion (€2.7 trillion) by the end of the year according to a survey by Deutsche Bank.
The survey of 435 hedge fund investors, representing over $1.8 trillion in assets under management (AUM) also found that asset growth continues to be concentrated among the largest managers. Since 2008, assets managed by firms with more than $5 billion AUM have grown by 141% compared to 53% for firms with less than $5 billion. It's estimated that 200 hedge funds account for more than two-thirds of industry assets.
Selecting the right manager has become increasingly important as the gap between underperforming and outperforming hedge funds widens. Last year the average hedge fund returned 3.3%, while the top 5th percentile returned more than 22%.
Investors risk/return expectations for traditional hedge fund products are becoming more conservative with steady and predictable performance being preferred. Only 14% of respondents still target returns of more than 10% for their hedge fund portfolio, compared to 37% last year.
However, 40% of respondents now co-invest with hedge fund managers as a way to increase exposure to a manager's best ideas and enhance returns. 72% of these investors plan to increase their allocation in 2015.
Following a strong year of performance, at least one in every three respondents are planning to increase their allocation to quantitative strategies in 2015. Three of the most sought after quantitative strategies include commodity trading advisor, quant equity market neutral and quant equity.
Increasing numbers of investors are looking for opportunities in Asia with 30% of hedge fund respondents by AUM plan to increase investment in Asian managers over the next 12 months, up from 19% last year. India is seen to be a key beneficiary of flows, with 26% of investors by AUM planning to increase exposure to the region, whereas only 4% said the same last year.
Respondents from 26 different countries completed the survey. Approximately half of responding investors manage more than $1 billion in AUM, and 20% manage over $5 billion. Those who took part included asset managers, public and private pensions, endowments and foundations, insurance companies, fund of funds, private banks, investment consultants and family offices.
"Hedge fund managers who continue to focus on alignment of interests with the allocator community will have an increasingly competitive advantage as our industry grows and evolves," says Murray Roos, co-head of global prime finance at Deutsche Bank. "Reward for alpha generation and co-investment opportunities will be key factors in building strong partnerships between limited partnerships and general partnerships."
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