Investors Predict Record HF AUM, Favor Event-Driven Funds

Mar 11 2014 | 10:39am ET

Hedge fund investors expect industry assets under management to grow 12% this year to an all-time high of $2.8 trillion, according to new research from Credit Suisse.

The bank polled 500 respondents—including pension funds, endowments, consultants, family offices and funds of hedge funds—representing $1.16 trillion in hedge fund investments for its sixth annual Hedge Fund Investor Survey.

Robert Leonard, global head of capital services at Credit Suisse, said some investors polled expect hedge fund AUM to hit $3 trillion this year.

“If accurate,” Leonard said in a statement, “this updated forecast would mean at least an additional $300 billion for the industry in 2014, coming from both performance and new capital inflows.”

Leonard said investors are generally more optimistic about hedge fund industry performance, increasing their expectations for returns this year.

The survey also measured investor preferences by strategy, noting an increase in appetite for event-driven strategies and a decline in interest in emerging markets strategies.

“[N]one of our respondents expect to decrease their allocations to [event-driven strategies], reflecting a unanimous vote of confidence. This level of increased interest was matched in magnitude only by the drop in appetite for emerging markets, which fell precipitously.”

Investors remain enthusiastic about equity long/short strategies, “pointing to an environment ripe for stock selection with decreased correlations and higher dispersions of returns.”

The survey also found that, despite modest returns in the past two years, global macro strategies are forecast to be among the top three best-performing strategies in 2014 with discretionary macro expected to be an area of particular focus for investors this year.

The survey also noted shifts along regional lines, with investors showing more interest in developed Europe (43%) and Japan (33%). Net demand for North American strategies stood at 15%, up marginally from 2013. Emerging markets rated only 10% net demand, down sharply from 42% in last year’s survey.

Investors preferred management fee discounts to incentive fee discounts by a magnitude of 3:1. One-third of investors named hurdle rates as their preferred fee structure incentive.

The survey found “strong, though selective” appetite for new hedge funds, provided they were of institutional quality. A full 40% of investors is open to investing in a new fund with a Founder’s Share class; 11% indicated interest in a seed investment with economic interests; and only 6% would be a day-one investor without any economic concessions.

Fund size continues to be a factor in allocations—twice as many investors would allocate to funds with AUM over $100 million as to funds with under $50 million.

Investors anticipate potential capacity constraints in 2014, as some fund managers return money and/or close to new capital while others decide to leave the business completely. Some respondents also indicated that this could be an opportunity for newer and mid-sized funds to raise additional capital this year.

Investors cited crowded trades/herd behavior, risk complacency and funds chasing equity markets as their top three concerns.


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