Institutions expect greater returns from hedge funds

Date: Friday, March 8, 2013
Author: James Langton, Investment Executive

Institutional investors are expecting more from hedge fund managers in the year ahead, according to a new survey from Credit Suisse.

The firm reports that return expectations among institutional investors have increased to 6.9% from a forecast of 5.4% last year. "This appears to coincide with the ongoing reduction in correlations and the belief that this will create an environment for stock-picking strategies to outperform," it says.

And, they expect industry assets to increase, too. The average forecast for total industry assets at the end of 2013 was US$2.42 trillion, which represents an industry growth rate of over 10%, and would push hedge fund industry assets to a record high.

The survey also found that long/short equity is the most sought after strategy in 2013, followed by emerging markets equity and event-driven strategies. In terms of regional preferences, Credit Suisse says that emerging markets and the Asia-Pacific regions remain in the top two spots.

Additionally, it reports that investors ranked crowded trades/herd behavior, additional regulatory changes, and underperformance, as the three greatest sources of risks facing the hedge fund industry this year. Sovereign default risk and credit/counterparty risk, which were both in the top three last year, dropped significantly, Credit Suisse notes.

Investors are also expecting further hedge fund consolidations/liquidations this year, along with additional fee compression, and growth of alternate structures, such as long-only vehicles, it reports.

The survey, which is produced by Credit Suisse's Hedge Fund Capital Services Group, queried almost 550 institutional investors with over US$1.0 trillion of hedge fund investments, including pension funds, consultants, family offices and funds of hedge funds.