Hedge fund investors increase focus on risk management, says Deutsche survey

Date: Wednesday, May 7, 2008
Author: Hedgeweek.com

Risk management has joined the performance, philosophy and pedigree of hedge fund managers among the key criteria for investors in manager selection, according to the sixth annual Alternative Investment Survey undertaken by Deutsche Bank's hedge fund capital group.

According to Sean Capstick, the London-based global co-head of the group, risk management has been gaining in importance as an investment criterion since 2005 but its displacement of manager pedigree from third place marks the first time since 2002 that the so-called 'three Ps' have been joined by another key selection factor.

At the same time, however, the survey respondents - some 1,000 individuals from 500 investor firms worldwide representing nearly USD1trn in hedge fund assets - expect the industry to bounce back after first-quarter inflows amounted to just USD16.5bn, the lowest total in four years, according to Hedge Fund Research.

Participants' responses suggest a median total industry inflow this year of USD200bn. While 80 per cent of respondents were bearish about the global economic outlook for 2008, compared with just 7 per cent who were bullish, the optimists are in the ascendant for next year with the 40 per cent made up of bulls outweighing 27 per cent of bears.

With more than 30 per cent of the investors surveyed holding cash, mostly at levels of between 5 and 10 per cent of their hedge fund portfolio assets, 53 per cent expect to invest their cash holdings by March next year. Respondents expect hedge fund performance to average 7.5 per cent cross the industry this year - but reckon that their own  portfolios will return 10 per cent.

The survey was conducted in March among banks, corporations, insurance companies, consultants, family offices, high net worth individuals, wealth management firms, funds of funds the largest group at some 40 per cent), pension funds, endowments and foundations in North America, Europe and Asia.

'Hedge fund investors' prediction that the Middle East and North Africa will be the top performing region in 2008 indicates a clear redistribution of capital toward emerging markets,' Capstick says. 'The survey also shows that the number of early stage investors has fallen by 25 percent in the past year, making 2008 a more challenging environment for start-up funds.'

His fellow co-head of the hedge fund capital group, New York-based Maarten Nederlof, adds: 'Hedge fund investors are cautiously poised, as shown by their increased focus on risk management and plans to allocate to strategies that are not sensitive to equity market risk.'

The majority of investors surveyed plan to increase their allocations to emerging markets, with the Middle East as the predicted top performer amongst all regions, but China and India were among the markets expected to perform worst. However, respondents predict that North America and Western Europe will be at the bottom of the pile this year.

The hedge fund investors surveyed expect macro, distressed, and equity volatility to be the top performing strategies in 2008, with asset-backed securities, merger arbitrage and equity long/short predicted to perform worst.

The survey also found that 70 per cent of hedge fund investors do not currently use or apply leverage to their portfolios, including 58 that would not consider it. The 30 per cent that are actively leveraging their portfolios include 6 per cent that do so through structured products.