The total assets being managed by hedge funds will cross $3 trillion for the first time before the end of 2015 according to Deutsche Bank’s outlook for the industry. As we’ve seen in other recent reports, the Deutsche Bank team thinks that hedge fund assets are likely to be further concentrated at the top reducing the role of the small manager.
The report also discovered that manager selection is becoming an ever more important part of the work of hedge funds and their investors. The gap between under-performing and over-performing managers is widening in general according to the survey. Despite the increasing spread, fewer managers are targeting massively outsized returns, preferring instead to take in steady, predictable returns.
Asset growth refuses to slow down
Total hedge fund assets have not been on a straight trajectory since the financial crisis but, despite a couple of bad years, the industry has managed to add about 10% to its total capital in the years since 2010. Total assets will cross the $3 trillion line for the first time in 2015, after crossing $2 trillion just a couple of years ago.
According to the Deutsche Bank survey, a good deal of that increase is set to come from institutional investors. The survey of investors found that 39% of those in charge of institutional money were planning on increasing their hedge fund allocation in 2015.
Deutsche Bank reckons that two thirds of the entire hedge fund’s assets are controlled by just 200 funds, and a process of further concentration is accelerating. Asset growth for managers controlling more than $5 billion sits at an average 141% over the last few years, while those with less than that number have grown by just 53% in the same number of years.
Slow and steady hedge fund growth
Institutional investors, with pension funds are their heart, aren’t looking for risky strategies that could double their money, they’re looking fro predictable, risk-adjusted ways to invest their money. According to the survey only 14% of investors are still looking for returns of more than 10% from their hedge fund investments.
37% of investors were looking for returns of more than 10% last year, a change demonstrating the dynamism of investors often competes with that of fund managers. 10% is a return level which signifies real investment talent of the sort unimaginable outside of Berkshire Hathaway or Bridgewater associates.
While reducing their expectations, institutional investors have gotten more involved in the decisions that hedge fund managers are making. 40% of them now co-invest with hedge fund managers and 72% plan to increase their allocation in co-investment funds in 2015.
The search for risk-controlled steady returns is causing an increased importance to be placed on manager selection and approaches that circumvent the manager altogether. The average fund returned just 3.3% in 2014, but managers in the top quintile managed to return more than 22%. This is a figure that Deutsche Bank says is widening, making manager selection an ever-greater responsibility for hedge fund investors.
That is, of course, unless the investors put the machine before the man. In the survey the bank found that one third of investment managers were planning on increasing their allocations to quantitative managers in 2015.
Quantitative management has still not managed to escape the cloud that settled over it in the 1990s, but a great 2014 has made many investors lighten their opinion of algorithm focused investment techniques.
Another popular method for avoiding the responsibility of manager selection is the use of intermediaries. Larger fund of funds are becoming larger. 13% of managers contacted in the survey managed 55% of the total assets held by intermediaries.
The Deutsche Bank annual Alternative Investment Survey involved the questioning of 435 hedge fund investors with control over $1.8 trillion in assets. Given that the entire hedge fund industry manages around $2.17 trillion according to Eurekahedge, this survey gives a solid indication of the overall situation in the hedge fund world, as seen from the side of the investor.