Hedge fund industry assets are set to surpass $3 trillion by the end of the year, according to Deutsche Bank’s 13th annual Alternative Investment Survey. Institutional investment in hedge funds is set to increase, with 39% of these investors planning to increase their allocation to hedge funds in 2015.
Deutsche Bank surveyed 435 hedge fund investors, representing over $1.8 trillion in hedge fund assets under management (AUM), who shared insights into their sentiment and allocation plans for 2015.
The survey 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 141%, compared to 53% for firms with less than $5 billion. Today, it is estimated that less than 200 hedge fund firms account for more than two thirds of industry assets.
“As institutional investors’ needs continue to evolve, they are increasingly looking to work with larger hedge fund managers and intermediaries who can meet their appetite for comprehensive portfolio solutions,” said Barry Bausano, Co-head of Global Prime Finance at Deutsche Bank. “More and more, we’re seeing today’s hedge fund assets concentrated among the largest managers.”
“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,” said 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.”
Manager selection is becoming increasingly important, as the gap between outperforming and underperforming hedge funds widens. While the average hedge fund returned 3.33% in 2014, the top 5th percentile generated returns greater than 22%.
Investors risk/return expectations for traditional hedge fund products continues to come down in favour of steady and predictable performance: only 14% of respondents still target returns of more than 10% for the hedge fund portfolio, compared to 37% in 2014.
With this in mind, 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 (CTA), quant equity market neutral and quant equity.