Asset growth has outstripped expectations in 2013, equity long/short strategies are popular, private wealth allocators like UCITS and Canadians are having trouble finding macro managers—those are some of the findings in the latest Deutsche Bank Markets Prime Finance Monthly Hedge Fund Trends report.
The 300 global hedge fund investors polled in DB's 2013 Alternative Investment Survey predicted hedge fund AUM would climb 11% in 2013, to $2.5 trillion by year end. But as of Q3 2013, those assets already stood at $2.51 trillion.
If they missed the rapid asset growth, investors were at least prescient about the most sought-after strategy in 2013—they predicted it would be equity long/short and equity long/short it is. Such strategies have attracted net inflows of $9 billion year to date and generated performance-based gains of $79 billion. European equity long/short managers—particularly high-quality fundamental stock pickers with capacity—have been in high demand from investors globally, reports DB.
DB analysts also noted a predilection among private wealth allocaters for alternative UCITS funds. Although assets in such funds account for only 2% of the €6.6 trillion UCITS market in Europe, “recent growth rates suggest that the gap will narrow in the coming years,” said the report.
“Alternative UCITS have experienced a CAGR of 30% since Q3 2008, while the overall UCITS market has grown 3% over the same time period. In the past year we have seen considerable demand for the liquid alternative strategies from the private wealth allocators, specifically those in the UK and Switzerland.”
A recent survey by DB's hedge fund capital group found that 46% of investors allocating to alternative UCITS increased their allocations to such products last year, and 66% plan to increase their allocations over the next 12 months.
DB looks more closely at Canada in this latest report and finds the Canadian allocator community—pensions, endowments, funds of funds—to be “very sophisticated” with “mature well-established hedge fund portfolios.” As a result, says DB, “many allocators are opportunistically upgrading existing strategies on a case by case basis, rather than running specific strategy searches.” That said, some Canadian allocators are finding it difficult to source macro strategies. DB also noted “some appetite” for “best-in-class emerging managers” from Canuck investors.
European allocators—particularly pension funds—on the other hand, are growing ever-more sensitive to hedge fund fees. DB reports that a number of institutional allocators pay a disproportionate amount of their overall fees to their hedge fund managers, which in aggregate account for a relatively small percentage of the portfolio. As a result, these allocators are keen to lower the average management fee paid hedge fund managers.
And finally, DB notes that hedge fund marketing in Europe continues to be influenced by uncertainty around the Alternative Investment Fund Managers Directive, specifically with regard to marketing non-EU AIFMD in Europe. A recent DB survey found that over a third of EU-based managers and 43% of U.S.-based managers have been utilizing transitional marketing provisions since AIFMD came into effect on July 22, 2013. Half of managers in the survey have chosen to rely solely on incoming investor requests for information regarding their funds until they have further clarity on marketing into Europe under AIFMD.