Credit Suisse has releasef its annual Global Hedge Fund Investor Survey, in which they analysz responses from over 600 institutional investors, representing $1.04 trillion of hedge fund investments, on a number of topics. These include investors’ current sentiment towards the hedge fund industry and their predictions for its growth prospects; their allocations plans across various strategies and regions; their return forecasts for the year ahead; and their views on key new trends and developments in the industry.
The title of this year’s survey, “Finding Direction in Uncertain Terrain”, reflects the quest by hedge fund managers and institutional investors alike for outperformance in the currently challenging and erratic market conditions.
Robert Leonard, Managing Director and Global Head of Capital Services at Credit Suisse commented: “Institutional investors remain positive on hedge funds and on the outlook for further industry growth. They continue to look to hedge funds to generate uncorrelated returns and to reduce overall volatility within their portfolios.”
When respondents were asked to forecast total industry assets at the end of 2012, the average prediction was US$2.13 trillion. This would represent an industry growth rate of 12%, which would come from both performance and new inflows. Investors thus generally intend to remain active in their new allocations to hedge funds this year.
Investors were then asked to forecast which hedge fund strategies will perform best during 2012. The responses were as follows:
_ 27% of respondents forecasted Global Macro as the top performer
_ 19% of respondents forecasted Long/Short Equity as the top performer
_ 18% of respondents forecasted Emerging Markets as the top performer
Respondents also shared their insights into which hedge fund strategies they anticipate allocating capital to during 2012:
_ Global Macro is currently the most sought-after strategy for 2012
_ Commodity Trading Advisors (CTA) is the second most favoured strategy
_ Fixed Income Arbitrage moved up from 15th place last year to 3rd place this year
In terms of geographic preferences, Asia and Emerging Markets have remained at the top of investors’ buy list for a second year running. As developed markets continue to wrestle with debt and deleveraging issues, many investors perceive Asia and Emerging Markets to have relatively stronger growth prospects. North America was the third most frequently mentioned region in this category.
Investors continue to show appetite for new hedge funds that can “check the box” on a number of key requirements. These include pedigree, continuity, differentiation and institutional quality. Over half the respondents indicated that they can invest in a start-up manager with a three-year-plus track record from another fund, but that number drops to only 20% for managers without an explicit track record.
The survey also uncovered a number of other key new industry trends and developments for 2012:
_ Investors have adjusted their target returns expectations for their hedge fund portfolios, to account for the current low interest rate environment and difficult market conditions. The average expectation for returns in 2012 was 8.6%, down from 11% in 2011.
_ Respondents ranked crowded trades/herd behaviour, sovereign default risk and counterparty/credit risk as the three greatest sources of risks facing the hedge fund industry today. Increasing regulatory requirements were also identified by 32% of respondents as having potential for significant impact on the hedge fund industry.
_ Investors expect to see an acceleration in the number of hedge fund consolidations/liquidations this year, predicting that only managers with demonstrated ability to generate uncorrelated alpha and manage risk within an institutional framework will continue to attract assets.
_ Founders’ share classes (featuring discounted fees) have become an increasingly popular way for new hedge funds to attract early-stage capital. Over two-thirds of investors surveyed indicated that they were interested in or already actively invested in founders’ share classes of hedge funds.
_ Investors also reported that, in order to cope with new and pending regulations, many funds have been increasing their legal and compliance staff-count and have hired a Chief Compliance Officer.
Mr Leonard added: “From this year’s survey we can conclude that institutional investors will remain active in making hedge fund allocations, as they consider hedge funds to be an important tool for risk mitigation against the backdrop of ongoing market uncertainty.”
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