Hedge fund assets could reach $3 trillion, according to Deutsche Bank
Hedge fund Assets under Management (AuM) are expected to reach $3 trillion by the end of 2014, up from $2.6 trillion in 2013, according to the Deutsche Bank Global Prime Finance Alternative Investment Survey.
This number is based on investors’ predictions of $171 billion in net inflows at hedge funds and performance-related gains of 7.3%, representing an additional $191 billion in capital. The majority of these inflows will be driven by institutional investors.
The survey, which polled 400 investors with more than $1.8 trillion in hedge fund assets, found nearly half of institutional investors increased their hedge fund allocations in 2013 and 57% plan to increase their exposure over the course of 2014. It added institutional investors now account for two thirds of industry assets compared to one third before the financial crisis.
The institutionalisation of hedge funds is well-documented. A study by Barclays Prime Services earlier this year estimated that 60% of new investor capital in 2014 would be derived from institutional investors, of which 45% would come from public and private pension plans. Investors surveyed by Barclays were equally bullish with 82% confirming they planned to increase or maintain the number of hedge funds in their portfolios.
Hedge funds displayed solid performance in 2013 with the average manager posting gains of 8.7% last year, their best showing since 2009, according to Hedge Fund Research, the Chicago-based data provider. Eighty per-cent of Deutsche Bank’s respondents said hedge funds performed as expected or better in 2013. In terms of strategies, equity long/short and event driven are the most sought after.
“With the majority of investors happy with hedge fund performance, we expect institutional investors to further strengthen their commitment to hedge funds. Last year’s respondents targeted 9.2% for their hedge fund portfolios and hedge funds delivered – the weighted average return for respondents’ hedge fund portfolios this year was 9.3%. Looking forward, respondents are targeting 9.4% for 2014,” said Anita Nemes, global head of the Hedge Fund Capital Group at Deutsche Bank.
Fees have declined marginally from the traditional 2% management fee and 20% performance fee. The average management fee and performance fee now stands at 1.7% and 18.2% respectively, according to Deutsche Bank. Despite sluggish performance, hedge fund fees have not declined markedly.
A Goldman Sachs study in 2013 found that 83% of investors paid full fees while 68% of pension funds – historically the most vocal investor constituent on fees – paid full or non-negotiated fees. A similar survey by international law firm Seward & Kissel revealed 90% of investors paid the full 2 and 20 on all non-equity focused hedge fund strategies.
The Deutsche Bank study acknowledged investors were willing to pay for performance, with nearly half stating they would pay in excess of 2 and 20 if the manager “has proven consistent strong performance in absolute terms.”