Global hedge fund assets may rise 12 percent this year to a record $2.26 trillion as investors reduce cash and seek returns, according to an annual survey of investors by Deutsche Bank AG.
The industry may see $250 billion of net inflows and performance gains this year, according to the survey. The number of investors with 10 percent to 30 percent of their holdings in cash is expected to halve in the next six months, helping free up $39 billion for potential hedge fund investments, the survey showed.
Investors are betting on positive returns and growth in hedge funds even after market selloffs followed by “quick and exaggerated snapbacks” made it difficult for many managers to consistently make money last year, according to the report. Hedge funds globally lost 5 percent on average, the second-worst annual return since Chicago-based Hedge Fund Research Inc. began to track data in 1990.
“Performance is key in a low-yield environment,” said Anita Nemes, London-based global head of capital introductions in Deutsche Bank’s prime finance division, in an e-mailed statement. “Institutional investors recognize the potential for strong hedge fund returns in 2012.”
Deutsche Bank in December polled 392 investors who controlled $1.35 trillion of hedge fund assets, including pensions, foundations, endowments, government organizations, funds of funds, private banks, investment consultants and family offices.
The same survey last year had predicted industry assets to reached $2.25 trillion at the end of 2011 with $210 billion of inflows. Hedge funds globally ended the year with $2.01 trillion, this year’s report said.
About 48 percent of investors were holding more than 5 percent of their investments in cash going into 2012, compared with 30 percent a year earlier, as they prepared to re-allocate their investments, according to the survey.
“Hedge funds underperformed in 2011 as an asset class, but on a relative basis proved their worth with respect to the preservation of capital,” said Harvey Twomey, the bank’s Hong Kong-based Asia-Pacific head of prime finance sales. “The asset class has started the year in a strong fashion and many funds are on track to deliver against 2012 performance targets.”
Net inflows into the global industry may amount to $140 billion this year, said the report.
Investors in the survey on average expect the HFRI Fund-Weighted Composite Index to return 6 percent this year, trailing a possible 6.4 percent rise in the S&P 500 Index but limiting losses in severe downturns, the report said.
One-third of all investors in the survey increased hedge fund allocations last year. Forty percent of pensions expanded their hedge fund investments by at least $500 million last year, according to the report.
Investors will continue to show preference for larger managers overseeing more than $1 billion, helped by outperformance by some of them in 2011 and as more institutions allocate directly to hedge funds instead of going through funds of hedge funds, the survey showed.
About 44 percent of the investors surveyed already allocate to managers running more than $1 billion of assets. Yet 65 percent of the respondents said they would give money to smaller hedge funds as larger managers reach their capacity and smaller, more nimble managers promise higher returns, it added.
About 86 percent of the investors in the survey plan to maintain or increase their allocations to Asia outside of Japan this year, said Twomey.
Asia-focused hedge funds lost on average 8.5 percent last year, according to Singapore-based data provider Eurekahedge Pte.