Deutsche Bank is projecting a 7% increase in assets under management at the world’s hedge funds this year. The firm based that projection on the results from its 13th annual hedge fund survey. Deutsche Bank surveyed 435 hedge fund investors who represent more than $1.8 trillion in assets under management about their plans for fund allocations and sentiment on the industry.
Biggest hedge funds are getting even bigger
The firm said in a press release today that the global hedge fund industry is on track to surpass $3 trillion in assets under management by the end of this year. The survey indicated that 39% of institutional investors are planning to increase their investments in hedge funds.
Deutsche Bank also reports that asset growth is still the highest among the biggest hedge funds, as has been the case since 2008. The survey found that firms which manage more than $5 billion have grown 141%. That’s compared to a 53% growth rate for smaller hedge fund firms.
The investment bank estimates that fewer than 200 firms make up over two-thirds of the assets in the entire hedge fund industry.
How investors choose a hedge fund
Probably one of the reasons the biggest hedge funds are attracting the lion’s share of the industry growth is because of the ever-widening gap between outperforming and underperforming funds. According to Deutsche Bank, the average hedge fund returned 3.33% last year, but the top fifth percentile of hedge funds saw returns higher than 22%.
Unsurprisingly, investors are also seeking steadier and more “predictable risk-adjusted returns,” according to the firm. The survey indicated that expectations for risk and return on traditional hedge funds have plunged, while the desire for performance that is steadier and more predictable increased. Just 14% of those who took part in Deutsche Bank’s survey said they want to see returns greater than 10% for a head fund portfolio. Last year, 37% of them said they were looking for returns that high.
However, the investment bank added that 40% of those who participated in the survey co-invest with hedge fund managers so that they can see greater exposures to the managers’ best ideas, thus seeing greater returns. Additionally, 72% of the investors in this group are planning to raise their allocation this year.
Quantitative strategies, Asia becoming popular
In 2014, hedge funds following quantitative strategies performed very well, and as a result, they are becoming more popular. According to Deutsche Bank, a third of the most sought-after quantitative strategies are “commodity trading advisor (CTA), quant equity market neutral and quant equity.”
Hedge fund investors are also looking to Asia for more investment opportunities. The firm found that 30% of its survey participants are intending to invest more in Asian hedge fund managers in the next year. That’s a significant increase from the 19% who said last year that they were intending to do that.
In particular, investors’ appetites are starting to be whetted by the opportunities in China. The survey indicated that 25% of investors by assets under management intend to invest more in Chinese hedge fund managers, compared to 11% the previous year.
India is also expected to see a big-time increase in inflows, as 26% of investors said they plan to increase their portfolio’s exposure to the nation, compared to last year’s 4%.