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Deutsche Bank Sees Hedge Fund AUM Up 15% in 2010

Date: Friday, March 19, 2010
Author: Bill McIntosh, The Hedgefund Journal

A new investor survey from Deutsche Bank’s Hedge Fund Capital Group is forecasting net inflows to hedge funds of $222 billion during 2010, a rise of 15% to $1.722 trillion from an estimated $1.5 billion managed at the 2009 year-end. The recovery in AUM would mark the second biggest ever annual increase for the industry.

That buoyant news is partly overshadowed by 50% of investors reporting that regulatory issues will be the greatest challenge for mangers in 2010. A year ago, before the AIFM Directive and US regulatory initiatives had moved into full view, only 20% of investors surveyed expressed this as a concern.


“The hedge fund industry has bounced back with a vengeance,” Sean Capstick, a Deutsche Bank managing director and global head of capital introduction, told a briefing on the 2010 Alternative Investment Survey. “The bounce back from one year ago is not short of spectacular.”

Capstick said the rebound follows a recovery in confidence among hedge fund investors who see 10-15% returns in their hedge fund investments outperforming an expected 5-10% rise in the S&P 500 in 2010. The survey found growing risk appetite with 51% of investors wanting to allocate to equity long/short, while market neutral funds declined for a second year running with just 17% of investors looking to add to their allocations. Asia ex-Japan, Latin America, China and North America markets are forecast to be the best performers, while Western Europe is forecast to be the worst performer.

The eighth annual edition of the survey featured over 600 respondents who together have allocations of $1.07 trillion to single manager hedge funds. The respondents completed the survey in January.

The growing institutionalisation of the hedge fund industry is a clear theme running through the survey’s history. Angharad Fitzwilliams, the author of this year’s survey, noted that in 2002 64% of investors surveyed were willing, in principle, to invest with managers who had no assets under management. However, now the survey found that 50% of investors would only invest with managers who had AUM of at least $100 million.

The survey also uncovered growing investor appetite for putting hedge fund strategies into UCITS III wrappers. It recorded a 50% year-on-year growth in UCITS AUM and found that 34% of investors plan to allocate to such hedge funds in 2010. In addition, 33% of investors surveyed expressed a preference for UCITS hedge funds over the traditional Cayman structure.

Albourne Partners estimate that around 265 UCITS hedge funds now manage some $47 billion. It is expected that the number of UCITS hedge funds will surpass 400 by the fourth quarter of 2010.

In a footnote to the 2007-08 liquidity crisis, the survey found that 80% of investors said they would not allocate to a manager who had frozen or suspended redemptions or increased a side-pocket. This dwarfed the 20% of investors who cited bad investment performance as most damaging to a fund’s reputation.

Investor concern about custody post-Lehman also generated a strong reaction from investors. Fully 82% of respondents expressed a preference for a tri-party segregation model in which hedge fund assets are segregated with an independent, third-party custodian to guard against prime broker insolvency.