Redemptions biggest challenge facing hedge fund industry, says survey

Date: Friday, March 27, 2009

The biggest challenge facing managers in the next 12 months is primarily redemptions, according to a survey of 1,000 investors by Deutsche Bank.

The survey found that although redemptions have slowed down since 2008, managers and investors are still suffering, with respondents predicting outflows in 2009 of USD168bn.

Deutsche Bank says that while markets remain volatile and performance elusive, redemptions will continue to be an ongoing concern for managers throughout 2009.

'January and February this year, relative to the second half of 2008, have proven to be relatively good months for many hedge funds,' the report says. 'We also feel that although managers and investors are both still experiencing redemptions, in many cases these have now slowed. A few good months performance for funds should have a calming effect on the industry. A few good quarters should have a very positive effect on the industry. Whether this will happen, we have yet to see.'

The survey also found that respondents are sitting on USD294bn of cash and in six months' time they expect to have reduced this to approximately USD212bn. This suggests that USD82bn of cash will be invested in the next six months.

However, sixty eight per cent of respondents expect hedge fund assets to be down USD168bn this year, taking the industry to USD1.33tn.

The survey also found that investors, like hedge funds, have de-levered. Seventy two per cent of investors have reduced their exposure to leverage and 63 per cent are not interested in applying leverage to their own portfolios this year.

Continued consolidation and a premier league of hedge funds are emerging, with 50 per cent of respondents investing in hedge funds with an average AUM of between USD800mn and USD4bn, ensuring the larger funds continue to grow.

The survey suggests recent events have made investors more attentive. Risk management has moved to being the second most important factor when selecting a manager and transparency has joined the top five manager selection criteria.

Historically, investors have indicated the '3Ps': performance, philosophy and pedigree to be the most important characteristics when selecting a manager. However, this year, risk management has displaced philosophy as the second most important criteria and transparency is now fourth, pushing manager pedigree to fifth place.

Respondents also indicated an increased appetite for managed accounts. Forty three per cent of investors are now considering making a proportion of their investments through managed accounts, presumably because of the additional transparency, liquidity and reporting benefits.

Investors overwhelmingly predict global macro to be the best performing strategy in 2009, followed by CTAs and equity long/short, perhaps pointing to the attraction of liquidity. However, these strategies were rivalled by distressed and credit L/S, among the least liquid.

The US is predicted to be best performing region this year. Forty six per cent of investors think that the US will be best performing region in 2009, while Eastern and Central Europe and Russia are predicted to perform the worst.