New Hedge Fund Deposits to Triple, Deutsche Bank Says

Date: Monday, February 25, 2013
Author: Bei Hu, Bloomberg

New allocations to hedge funds may more than triple this year, pushing the global industry’s assets to a new high, according to an annual survey by Deutsche Bank AG. (DBK)

Hedge fund assets worldwide may increase 11 percent to $2.5 trillion by year-end, according to the survey by the Germany’s largest bank. Investors indicated they will add $123 billion of capital to the industry, in addition to investment returns that are expected to boost assets by $169 billion, the Frankfurt- based bank said.

Hedge funds are forecast to draw more net deposits as investors, especially institutions, pursue more stable returns with low correlation with other assets such as stocks and bonds, the report showed. The $2.3 trillion global industry gained an average 6 percent last year, taking in $34.4 billion of net inflows, according to Chicago-based data provider Hedge Fund Research Inc.

“Despite a challenging market backdrop in 2012, hedge fund performance toward the end of last year and the beginning of this year has been promising,” said Harvey Twomey, the bank’s Hong Kong-based head of prime finance distribution for Asia.

Investors are eager to allocate more to managers that can deliver steady performance in the future, he added.

The annual survey, the 11th, polled 324 pension, endowment, fund of funds, foundations, insurers, consultants, private banks and family offices in 25 countries that manage or advise on a combined $1.2 trillion of hedge-fund assets.

Boosting Allocations

“Overall, 2013 looks to be promising for the industry,” authors led by Marlin Naidoo, who heads the bank’s hedge fund capital group for Americas, wrote in the report. “Those hedge funds that are able to post consistent returns year after year are emerging as an attractive option for investors looking for both better risk-adjusted returns and capital preservation.”

About 62 percent of the investors said they expect their hedge fund holdings to increase this year, compared with 42 percent whose allocations increased in 2012, the survey showed.

Sixty-five percent of all investors in the survey, including 79 percent of institutions, target returns between 5 percent and 10 percent for their hedge fund investments this year. Hedge fund underperformed the 13 percent rally in the MSCI World Index (MXWO) last year as prices of so-called risky assets such as stocks advanced on easing global macroeconomic concerns.

“The current market backdrop has unquestionably changed since the days of double-digit return expectations,” the report said. It added a return in the high teens is now considered attractive because of low interest rates and politics-driven markets.

Pension Investors

About 57 percent of institutions, including pension plans, endowments, foundations and insurers, reported increased hedge fund holdings last year, while 37 percent of non-institutions such as family offices, private banks, asset managers and funds of hedge funds did so, the survey showed.

Discounting returns and withdrawals, 44 percent of institutions added capital to hedge funds last year, versus 10 percent of non-institutional investors, it added.

Pension funds, in particular, are building up their hedge fund investments, with 66 percent of them having increased such holdings in 2012, said the report. By contrast, 57 percent of private banks saw declines last year.

About 47 percent of pension funds plan to increase their hedge fund allocations by at least $100 million this year, according to the report. Mounting funding gap is pushing pensions to accelerate hedge fund investments in hopes of excess returns over benchmarks, it said.

“We expect their increasing contribution in the industry to continue and serve as a bellwether for other institutional investors,” according to the report.