Report: Hedge Fund Assets Will Continue Growing in 2015, But Executives Recognize Underperformance

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A new survey, released Tuesday by Deutsche Bank, reveals that hedge fund executives expect hedge fund assets to grow by 7 percent and exceed $3 trillion in 2015, including $60 billion of net inflows.

But the majority of executives and investors surveyed – 66 percent – also recognized that hedge funds underperformed in 2014.

From the Wall Street Journal:

Investors included in the survey had on average expected returns of 8.1%, but said they only got returns of 5.3%.


However, some investors are planning to invest more in hedge funds, despite last year’s lackluster returns.

The survey said 39% of investors plan to increase allocations to hedge funds this year, including 22% who expect to increase the size of their allocations by $100 million or more.

Other key findings from the survey, from a Deutsche Bank press release:

Investors are looking for steady and predictable risk-adjusted returns – Investors risk/return expectations for traditional hedge fund products continues to come down in favor of steady and predictable performance: only 14% of respondents still target returns of more than 10% for the hedge fund portfolio, compared to 37% last year.

With this in mind, however, 40% of respondents now co-invest with hedge fund managers as a way to increase exposure to a manager’s best ideas and enhance returns. 72% of these investors plan to increase their allocation in 2015.

Investors see increasing opportunity in Asia – 30% of hedge fund respondents by AUM plan to increase investment in Asian managers over the next 12 months, up from 19% last year. Even more noteworthy is the growing percentage of investors who see opportunity in China, up to 25% from 11% by AUM, year-on-year. India is expected to be a key beneficiary of flows, with 26% of investors by AUM planning to increase exposure to the region, whereas only 4% said the same last year.


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CalPERS’ Withdrawal From Hedge Funds Not Yet Indicative of Broader Trend

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California is a bellwether for the rest of the country in many ways – and that sentiment applies to pension fund investment strategy, as well.

CalPERS made headlines this summer when it announced its decision to cut its hedge fund investments by nearly 50 percent. A handful of other funds, like the Los Angeles Fire and Police Pensions system and the Louisiana Firefighters’ Retirement System, have made similar decisions.

But those within the industry say none of that is indicative of a wider trend. From the Financial Times:

Alper Ince, managing director at Paamco, a California-based fund of hedge funds with $9bn of assets, believes that Calpers’ decision is unlikely to be indicative of a wider trend because “hedge fund investing has now become mainstream for pension funds”.

Arno Kitts, head of UK institutional at BlackRock, agrees: “People do pay attention to Calpers but there are plenty of hedge funds that have delivered consistent long-term performance with good risk-adjusted returns, which are uncorrelated with other assets.”

US public pension funds account for approximately 14 per cent of hedge fund assets owned by institutions, according to Preqin, the data provider.

Amy Bensted, head of hedge fund products at Preqin, says the shift by Calpers could fuel concerns that US public pension schemes are losing faith in the hedge fund industry.

“But I don’t think this is the start of a trend. The majority of US public pension schemes remain committed,” she says.

She points out that US pension funds in aggregate have been increasing their allocations to hedge funds steadily in recent years, a trend that has continued into 2014.

A recent Preqin survey found that 34 percent of hedge funds received more capital from pension funds in the first half of 2014 than they did in the second half of 2013.