Assets under management in the hedge fund industry are expected to grow by 11% this year to reach a record $2.5 trillion by the end of 2013.
According to Deutsche Bank’s 11th annual survey of hedge fund investors, two-thirds of investors believe hedge funds performed as expected or better in 2012. This year, 65% of investors and 79% of institutional investors are targeting returns of 5-10% from hedge funds.
Last year, 57% of private banks decreased their allocation of assets under hedge fund management, but almost 70% of pension funds increased their allocations. In 2013, nearly half of pension funds expect to increase allocations by $100m or more.
Investors reward high-performing hedge fund managers, the research found. Almost 80% of investors pay an average management fee of 1.5-2%, but three-quarters pay 17.5-20% for performance. Only 29% of investors who negotiate fees are successful more than half of the time.
The survey also found that hedge funds are no longer a stand-alone asset class. Institutional investors have moved from a traditional asset class allocation to a risk-based approach. A quarter of institutional investors have adopted this approach and half of consultants recommend it to clients.
Anita Nemes, global head of capital introduction at Deutsche Bank, said: “Investors are increasingly looking for steady and consistent returns as they balance portfolios according to a risk-based rather than asset-class approach. Top-performing managers continue to dominate, but besides performance, aligning interests with those of the investor is also critical in order to win attention from an increasingly institutional investor base.”
More than half of the investors surveyed individually manage and/or advise over $1bn in hedge fund assets, with 10% managing $10bn or more.
Sally Percy is editor of The Treasurer