About 500 institutional investors who responded to a new survey by Credit Suisse Group AG (ADR) (NYSE:CS) feel that aggregate assets under management by the hedge fund industry could scale nearly $ 3 trillion in 2014. This implies growth in flows during the year, considering both fresh investment and performance gains, of about $300 billion.
The globally representative survey which saw participation from respondents in the Americas, Europe, the Middle East, and Africa and Asia, was well-diversified across different investor types. It drew responses from family offices, advisers, pensions, insurance, endowments and institutional Fund of Hedge Funds (FoHFs) that had invested nearly $1.16 trillion in collective Single Manager Hedge Funds.
The survey provides a wealth of information on how the respondents are likely to position their investments in hedge funds by strategy or region in 2014.
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Hedge fund AUM: Investor appetite by strategy
According to the survey, which ranked strategy by net demand (percentage increasing or considering increasing minus percentage decreasing or considering decreasing), Event Driven topped the survey in terms of popularity, as per the chart below.
The strategy saw 49% net demand, compared to 30% in 2013, and the primary factors responsible for this surge in interest appeared to be an expectation that M&A activity would perk up as business confidence grows and corporates tap into cheap financing to buy rather than build.
Following on the heels of Event Driven are equity-based strategies such as Long / Short Equity – Fundamental (second place with 43% net demand) and Long / Short Equity – General (39%). Global Macro – Discretionary brought up fourth place with 31%.
Emerging markets continue to lose popularity. “We see a downward trend in appetite for Emerging Markets in both equities and fixed income. Net demand for Emerging Markets – Equity has fallen from second place in 2013 (with net demand of 34%) to eleventh in 2014 (with net demand 11%),” notes the survey. “Similarly, Emerging Markets – Fixed Income / Credit net demand has decreased from 17% to -3%, implying on a net basis that investors intend to reduce their capital allocated to this strategy over the coming year.”
Commodities and credit also appear to be investing laggards. At the bottom of the heap are CTA / Managed Futures (-10% net demand), Credit – Leveraged Loans / High Yield (-8%) and Commodity Strategies (-7%).
Investor sentiment – year-on-year swing in net demand
The chart below shows strategies that saw significant changes in demand compared to last year. The biggest negative swing was observed, not surprisingly, in Emerging Market – Equity, which saw a 23% dip in net demand over last year.
Similarly, Emerging Markets – Fixed Income / Credit was also a major loser with a negative 20% shift.
That investors have high expectations from event-driven strategies is clear from the 19% gain in net demand seen in Event Driven – General.
Investors’ regional preferences
Investing in Europe in 2014 appears to be the favorite regional choice among the respondents; in terms of net demand, it was the highest, at 43%. Investors are enamored of the region’s potential, following its ongoing economic recovery.
Runner-up favorite is Japan, with 33% net demand as investors cast a glad eye on the country’s steps to re-inflate the economy and purchase financial assets. The new policies are expected to make Japan’s exports more competitive because of a weakening yen.
The swing chart below demonstrates investors’ changing priorities in terms of regional asset allocations over the last year. Investors have high expectations from Europe (+19% net demand) and Japan (+17% net demand) during 2014, at the cost of Emerging Markets (-32% net demand).
Also interesting is the 8% positive swing in favor of the United Kingdom, which is in the limelight for the improvement in its economic fundamentals.