Survey Says, Growth Will Be Moderate

Date: Wednesday, January 17, 2007
Author: HFN Daily Report

According to a Deutsche Bank survey of hedge fund investors, the industry will continue to grow modestly in 2007, with projected inflows of $110 billion and average returns of around 10%.

Deutsche Bank contacted nearly 700 investor firms for the survey. About 47% of the firms were funds-of-funds, with family offices, pensions, banks and consultants also making up sizable chunks. Respondents represented more than $900 billion in assets invested in hedge funds, which corresponds to about two-thirds of the industry.

The median expectation for returns in 2007 was 10%, with most investors expecting better returns in emerging markets, Japan and Europe than in the United States. Based on responses, Deutsche Bank expects inflows to increase by 10% over 2006 levels to $110 billion in 2007. Funds dedicated to China will likely see a huge jump in assets, with inflows increasing 38% above current levels. Currency funds and credit arbitrage funds will probably see the largest outflows, with long-short funds focused on U.S. equities also seeing some of the largest redemptions.

The survey found that investors are looking at fewer but larger initial allocations, with the average initial allocation up to $28 million. It cited pensions, government organizations, endowments and foundations as making the largest initial allocations, averaging $46 million, and as being more willing to accept longer lock-up periods. Only 8% of all investors said they would not invest with a manager who requires a lock-up, and most of those investors were from Europe or Asia.

Respondents said the top criteria in selecting hedge fund managers are performance, pedigree and philosophy. The majority of investors said they make investment decisions within six months from their initial meeting with a fund.