Voted No. 1 Global Prime Broker 6 Years Running
Global Custodian, Prime Brokerage Survey 2008, 2009, 2010, 2011, 2012, 2013
Twelfth Annual
Alternative Investment Survey
The year of the horse: hedge funds go the distance
February 2014
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The Hedge Fund Capital Group would like to thank all investors that have
participated in the Deutsche Bank 2014 Alternative Investment Survey. This
is now the twelfth year that we have conducted the survey, making it one
of the most comprehensive and longest running global hedge fund investor
surveys available.
However, it is only with the help of our investor network that we can
accomplish this, and we know that this year investors have received a
number of requests to complete surveys. With this in mind, we thank these
institutions for taking the time to provide us with invaluable insights into
their allocation processes, thoughts and plans for the future.
Finally, we would like to thank our colleagues, who contributed to making
this year’s report particularly insightful.
We hope you find the survey of interest and we look forward to working
with you.
Barry Bausano
President, Deutsche Bank Securities Inc Co-Global Head of Markets Prime Finance
Anita Nemes
Global Head Hedge Fund Capital Group
Murray Roos
Co-Global Head of Markets Prime Finance Co-Head of EMEA Equities
Contents
Executive summary
Methodology & investor profile
Asset flow trends & predictions
Performance trends & predictions
Allocation plans
Portfolio construction
Fees & liquidity trends
Institutional investor focus
The convergence of funds of funds & consultants
Early stage investing & seeding
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... 109
When we first published this survey in 2002, the hedge fund industry was still in its nascent stages with $539bn in total AUM, representing a mere fraction (8%) of the $7tn mutual fund industry.1 In just twelve years, however, hedge funds have matured from a “cottage industry”
into a formidable part of mainstream asset management. By the end of 2013 industry assets had reached a record high of $2.6tn, representing 17% of the volume of US mutual funds assets.2
The growth and maturation of the industry has brought about great change to the role that hedge funds play in institutional investors’ portfolios. As leading managers continue to diversify their product lines, and institutional investors take a more dynamic, risk-based approach to asset allocation, we are increasingly seeing a blurring of lines in terms of how clients access and utilize hedge funds within the wider portfolio. The implications of such trends mean that “hedge funds” are no longer viewed as a separate asset class, but rather as broader portfolio solutions. Here, we take a look at the underlying themes that are shaping and strengthening the industry, enabling hedge funds to go the distance in 2014 and beyond:
Hedge fund assets expected to reach $3 trillion by year-end 2014.
2013 proved to be a positive year for the hedge fund industry, surpassing investors’ expectations set forth in last year’s survey. The industry grew by 17%, reaching an all time high of $2.6tn by year-end and exceeding the $2.5tn predicted by our global investor base in December 2012.3 Based on investors’ predictions for net inflows ($171bn) and performance-related gains
(7.3%, or $191bn), the hedge fund industry is expected to reach $3tn by the end of 2014.
Institutional investors’ commitment to hedge funds is not fading.
Nearly half of institutional investors respondents in our survey increased their allocations to hedge funds in 2013, and 57% plan to grow their hedge fund assets under management in 2014. Of those institutional investors who intend to increase their hedge fund allocations, almost half expect to add more than $250m. Today, institutional investors account for two thirds of industry assets, compared to approximately one third before the crisis.4
Better risk-adjusted returns: great expectations met.
80% of respondents feel that hedge funds performed as expected or better in 2013, after their hedge fund portfolios returned a weighted average of 9.3% for the year. Looking forward to 2014, 63% of respondents, and 79% of institutional investors, are targeting returns of less than 10% for their hedge fund portfolios for the year. After strong returns in 2013, equity long short and event driven are the most sought after strategies in 2014 based on investors’ net allocation plans.
A bigger part of a bigger pie? Hedge funds get reclassified.
The percentage of respondents embracing a risk-based asset allocation approach has increased from 25% to 39% year on year, while the percentage employing a traditional approach continues to decline, falling from 56% to 50%. The risk-based approach effectively removes historical constraints on the percentage allocation to absolute return strategies, allowing equity long short managers to compete with long only and fixed income absolute return funds to compete within the overall fixed income risk budget. With 58% of consultants recommending a risk-based asset allocation (41%) or some variation (17%) we expect this trend to continue, opening up significant growth opportunities for hedge funds. Furthermore, appetite for alternatives is also increasing, with 51% of investors planning to grow their allocations in 2014.
Hedge funds increasingly seen as diversified asset managers.
The hedge fund business model has changed considerably since 2008, and those managers that have focused on building true partnerships with their clients are seeing increased demand to service those clients across the portfolio. In a recent Deutsche Bank survey, half of manager respondents said that they offer non-traditional hedge fund products, and 48% of those managers have had more than half of new business since 2008 directed towards such products. 67% of responding managers said that demand from existing clients was a top reason for diversifying the product line. Results suggest that demand is expected to continue: 43% of investor respondents indicated plans to grow their allocations to non-traditional hedge products in 2014.5
1 HFR Industry Reports © HFR, Inc., www.HedgeFundResearch.com (data as of YE 2001); Bloomberg 2 HFR Industry Reports © HFR, Inc., www.HedgeFundResearch.com; Bloomberg
3 HFR Industry Reports © HFR, Inc., www.HedgeFundResearch.com; 2013 Deutsche Bank Alternative Investment Survey
4 Financial Times – “Hedge Fund Holdings Soar Despite Trailing Behind Equities” – 11 December 2013; theCityUK 2013 Hedge Fund Industry Report 5 Deutsche Bank Hedge Fund Capital Group - “From alternatives to mainstream” - November 2013
Methodology &
investor profile
Methodology
In December 2013, the Deutsche Bank Hedge Fund Capital Group approached our global hedge fund investor network to take part in this survey, and we gathered data over the subsequent month.
2013 was a year dominated by a strong rally in global equity markets. Central banks continued to support the financial markets with loose monetary policy, and the Nikkei saw its highest annual returns in over 40 years, due in large part to the introduction of “Abenomics”.6 European markets surged as investors grew increasingly optimistic about
the political and economic situation in Europe. Against this backdrop, hedge funds boasted performance-based gains of $312bn and received $64bn in net inflows, enabling the industry to reach a record high of $2.6tn by the end of 2013.7
This publication incorporates survey responses from 413 global hedge fund allocators who collectively manage and/or advise on $9.7tn in total assets and $1.8tn of hedge fund assets, approximately 70% of total hedge fund industry assets under management. While many more investors took part in this year’s survey, we have only included in our analysis those that completed the survey in its entirety.
Respondents to this survey are varied, both by geography and investor type. The information that follows includes their outlook for the industry, as well as specific trends that investors foresee for the hedge fund industry in 2014 and beyond.
Investor profile:
− Allocators from 29 different countries completed the survey. As anticipated, North America and EMEA collectively comprised the largest number of respondents, both when calculated by number (88%) and by hedge fund assets under management (“AUM”) (97%).
− The average respondent has $24bn in total firm AUM, with $4.3bn allocated to hedge funds. The median hedge fund AUM is $900m, and the mode is $2bn.
− Almost one third of the total hedge fund AUM ($555bn) is represented by investment consultants and institutional investors, which for the purposes of this survey are defined as pensions (public and private), endowments, foundations and insurance companies.
− Approximately half (46%) of responding investors manage $1bn+ in hedge fund AUM, and 18% manage over $5bn.
Please note that throughout the publication, percentages may not total to 100% in some graphs due to rounding.
6 CNN Money: “Japan index posts crazy 57% rise in 2013”, 31 December 2013 7 HFR Industry Reports © HFR, Inc., www.HedgeFundResearch.com
Respondents’ total hedge fund AUM by size
15% 10% 5% 0% 20% ≥$500m $501m to $1bn $1.01bn to $5bn $5.01bn to $10bn >$10bn 38% 16% 11% 7% 28% 25% 30% 35% 40%Source: 2014 Deutsche Bank Alternative Investment Survey
Investor breakdown by type (by hedge fund AUM and number)
Family office Endowment/ Foundation Government organization Private bank/ Wealth manager Pension fund (private and public) Investment consultant Asset manager Fund of funds 10% 20% 0% 30% 40% 50% 47% 37% 21% 7% 10% 12% 6% 8% 4% 7% 3% 15% 1% 3% 1% 0.5% Other 4%5% HF AUM Number Insuance company 1%6%
Americas (including LatAm): Breakdown by investor type (by hedge
fund AUM and number)
Endowment/ Foundation Insurance company Government organization Other Family office Private bank/ Wealth manager Investment consultant Pension fund (private and public) Fund of funds 10% 20% 0% 30% 40% 50% 60% 50% 36% 16% 8% Asset manager 7%10% 7% 8% 4% 5% 3% 16% 2% 9% 2% 1% 4% 5% 6% HF AUM Number 50% 0.4%
Source: 2014 Deutsche Bank Alternative Investment Survey
Breakdown of respondents by region (by hedge fund AUM and number)
EMEA Asia Pacific Americas (incl. Latam) 10% 20% 0% 30% 40% 50% 60% 70% 67% 56% 30% 32% 3% 12% HF AUM Number
EMEA: Breakdown by investor type (by hedge fund AUM and number)
Asia (including Japan, Australia & New Zealand): Breakdown by investor
type (by hedge fund AUM and number)
Family office Endowment/ Foundation Other Insurance company Private bank/ Wealth manager Pension fund (private or public) Investment consultant Fund of funds 10% 20% 0% 30% 40% 50% 40% 38% 36% 6% Asset manager 12% 18% 5% 11% 4% 8% 1% 2% 1% 12% 2% 2% HF AUM Number 0.4% 0.2% Other Private bank/ Wealth manager Pension fund (private or public) Fund of funds 10% 20% 0% 30% 40% 50% 60% 70% 42% 68% Asset manager 16% 13% 8% 1% 4% Investment consultant 1%8% 3% 8% HF AUM Number 9% Family office Government organization 2%4% 1% 12%
Source: 2014 Deutsche Bank Alternative Investment Survey
Asset flow trends
& predictions
Section highlights
− The hedge fund industry is expected to reach $3tn by the end of 2014, based on investors’ predictions for net inflows ($171bn) and performance-related gains (7.3%, or $191bn).
− Investors continue to rethink their approach to asset allocation: the percentage of respondents embracing a risk-based asset allocation approach has increased from 25% to 39% year on year, while the percentage employing a traditional approach continues to decline, falling from 56% to 50%.8
− 50% of responding investors increased their allocations to alternatives in 2013, including 46% who grew their hedge fund AUM.
− Over half of responding investors have plans to increase their alternatives exposure in 2014, and 62% plan to grow their hedge fund AUM. Notably, half of all pension fund respondents plan to allocate more than $100m to hedge funds over the next 12 months.
Overview
Over the past 8 years, the alternative investment management industry has experienced phenomenal growth. Between 2004 and 2012, global alternative assets under
management grew from $2.5tn to $6.4tn, representing a CAGR of 12.5%.9 Alternative
assets today account for 10% of global assets under management ($63.9tn), up from 6% in 2004.10 The tremendous growth in the volume of alternative assets has been largely
driven by institutional investors looking to incorporate both true alpha and return stream diversification into the core of their portfolios.
Alternative investments, which for the purpose of this discussion include hedge funds, private equity, real estate, infrastructure and commodities, have received ample consideration due to the manager skill and diversification benefits they can bring to the portfolio. Alternatives now account for approximately one fifth of global pension fund AUM, compared to 5% just 15 years ago, with demand expected to continue.11 Research
suggests that 43% of all institutional hiring activity in the first 11 months of 2013 was directed towards alternatives mandates, compared to 33% for traditional equity and fixed income assets.12 Hedge funds have been key beneficiaries of increasing institutional
flows to alternative investments, with two thirds of total hedge fund AUM now institutional capital, compared to less than one fifth in 2003.13 Research suggests that
alternative investments have the potential to exceed $13tn by 2020, capturing at least 13% of global assets under management (projected base case $101.7tn).14
In response to growing institutional demand for skill premia and diversification, large, well-established firms have been diversifying their product lines beyond traditional hedge fund products, a move that has increasingly blurred the lines between hedge funds, alternatives and traditional asset management. Those managers who have embraced product diversification as a growth strategy have been rewarded with new asset flows: indeed, 48% responding to a recent Deutsche Bank Survey have seen almost half of new business since 2008 directed towards their non-traditional hedge fund products (see “From alternatives to mainstream: Hedge funds changing role in the asset management industry”).15 Investors are increasingly finding themselves with new ways to access and
utilise hedge funds, within alternatives and beyond.
8 2013 Deutsche Bank Alternative Investment Survey
9 PwC Asset Management 2020: A Brave New World (www.pwc.com/assetmanagement); Deutsche Bank analysis 10 PwC Asset Management 2020: A Brave New World (www.pwc.com/assetmanagement); Deutsche Bank analysis 11 Towers Watson (www.towerswatson.com)
12 Pensions & Investments online (www.pionline.com)
13 Financial Times – “Hedge Fund Holdings Soar Despite Trailing Behind Equities” – 11 December 2013; 2011 Deutsche Bank Alternative Survey 14 PwC Asset Management 2020: A Brave New World (www.pwc.com/assetmanagement)
15 Deutsche Bank Hedge Fund Capital Group - “From alternatives to mainstream” - November 2013
“Institutional hedge funds today are the mutual funds of fifteen years ago.”
Focus on alternatives
Institutional and private wealth respondents16 in this year’s Alternative Investment Survey
manage a combined $1.1tn in alternative assets, representing approximately one sixth of total alternatives assets managed worldwide and 11% of total assets managed by respondents to this survey.17 A significant proportion of alternative assets in this survey
are represented by pension fund respondents (36%) and insurance companies (26%).
16 Analysis includes pension funds, insurance companies, endowments and foundations, family offices, private bank and wealth managers, and respondents in the “other” category. For the purpose of this analysis, we have excluded funds of funds and investment consultants to avoid double counting.
17 PwC Asset Management 2020: A Brave New World (www.pwc.com/assetmanagement); Deutsche Bank analysis 18 2013 Deutsche Bank Alternative Investment Survey
19 Bloomberg - “Wall Street is no enemy of public pensions” - October 2013
are by definition heterogeneous and idiosyncratic; there are a great many funds providing investors with exceptional skill based returns.”
European private bank
Average percentage allocation to alternatives by investor type
30% 20% 10% 0% 40% Family office 63% Endowment/ Foundation 54% Investment consultant 25% Pension fund (private and public)
25% Private bank/ Wealth manager 20% Insurance company 9% 50% 60% 70% 80% 90% 100% Allocation to alternativ
es, as a % of the total portf
olio Median Mean 63% 38% 54% 24% 33% 25%
Source: 2014 Deutsche Bank Alternative Investment Survey Error lines indicate one standard deviation from the mean.
It is evident that alternatives now represent a significant proportion of investors’ portfolios. The average percentage allocation to alternatives among respondents is significant at 46%. That said there is significant variation both between and within respondent types, as illustrated by the above graph. Certain investor segments have a substantial range in the size of their alternatives allocations, as indicated by the standard deviation bars.
Family offices have the largest allocations to alternatives among our sample set with a median and mean alternatives allocation of 63%. That said family offices are as
differentiated from each other as the families that they serve, and as such the size of their alternatives allocations varies quite substantially, as demonstrated by the large standard deviation. Endowments and foundations were early adopters of alternative investments and maintain fairly significant alternative exposures: the average endowment/foundation has more than half of the total portfolio invested across alternative investments (mean and median = 54%).
Pension funds in our survey have on average 24% of their portfolio invested in alternatives, which is up marginally from last year’s survey when the average pension fund respondent had one fifth of total assets in alternatives.18
Pension fund allocations to alternatives have been on the rise for some time. US-based consultant Cliffwater in a recent publication reported that US state pension funds doubled their allocations to alternatives between 2006 and 2012, and alternatives now account for 24% of US public pension fund assets under management.19
The average percentage allocation to alternatives among survey respondents is significant at 46%.
Half of responding investors increased their overall alternatives AUM during 2013, including 47% who grew their allocations to hedge funds and 32% who did the same for private equity. Given the difficult trading environment for commodities, it is not surprising that a net 11% of responding investors reduced their allocation size in 2013. It is important to note that the historical focus of this publication has been on the hedge fund industry, and as such we typically do have a bias towards those investors who allocate to hedge funds. Further, this was the first year that we expanded this question to other alternative investments, and hence we do not have historical data for comparison.
How has your allocation to alternatives changed during the last 12 months?
All investor respondents excluding funds of funds
By alternative investment type:
Decreased Stayed the same Increased
50%
42%
7%
30% 20% 10% 0% 40% Hedge funds 47% Private equity 32%Real estate Infrastructure
25% 13% Commodities 5% 41% 40% 43% 29% 32% 12% 8% 7% 2% 16% 20% 26% 57% 48% 50% 60% 70% 80% 90% 100% Allocation to alternativ
es, as a % of the total portf
olio
Increased Stayed the same Decreased Do not allocate
Source: 2014 Deutsche Bank Alternative Investment Survey
Source: 2014 Deutsche Bank Alternative Investment Survey
Half of responding investors increased their alternatives allocation in 2013.
How do you expect your allocation to alternatives to change in the next 12
months?
All investor respondents excluding funds of funds
By investor type:
Decrease Stay the same Increase
51% 47%
1%
Source: 2014 Deutsche Bank Alternative Investment Survey
30% 20% 10% 0% 40% Private bank/ Wealth manager 69% 31% Investment consultant 67% 33% Family office 47% 53% Insurance company 42% 58% Pension fund (private and public)
41% 56% 3% Endowment/ Foundation 29% 63% 8% 50% 60% 70% 80% 90% 100%
Increase Stay the same Decrease
Source: 2014 Deutsche Bank Alternative Investment Survey
Results from this survey confirm that investors will deepen their commitment to alternatives in 2014: over half (51%) of responding investors expect to grow their alternatives AUM over the next 12 months. When measured by the hedge fund AUM that they represent, a significant proportion of those who are increasing their alternatives exposure are investment consultants (62%). It is an interesting observation that the family offices, despite having significant allocations to alternatives (see page 13), are looking to increase their allocations further over the next 12 months.
More than half of responding investors plan to grow their allocations to alternatives in the next 12 months.
Interestingly, 69% of private bank/wealth managers are planning to increase allocations to alternatives in 2014. Results from a recent Deutsche Bank survey (“From alternatives to mainstream: Hedge funds’ changing role in the asset management industry”) lead us to predict that flows from this group will be increasingly directed towards liquid alternatives (including alternative ’40 Act mutual funds and alternative UCITS), rather than unregulated off-shore products. In the survey, we noted that liquid alternatives are seeing significant demand from the retail community, who are increasingly seeking new channels for wealth creation partially in response to the low interest rate environment. Such liquid alternatives offer absolute return products within a regulated framework and with a high level of liquidity - a compelling proposition for retail investors and high net worth individuals who tend to have liquidity sensitivities, investment restrictions and a preference for onshore regulated vehicles. The survey found that approximately one third of all private wealth respondents already invest in liquid alternatives; of those, two thirds plan to increase allocations to alternative ‘40 Act mutual funds in 2014 and nearly half (45%) plan to grow their alternative UCITS AUM.20
With this in mind, we asked investors the following:
Do you invest in any of the following products run by hedge funds?
30% 20% 10% 0% 40% Co-investment opportunities with hedge fund managers
19% Hybrid PE/ HF vehicle 18% Seed deals 16% Alternative ‘40 Act 9% Alternative beta 8% 50% 60% Number HF AUM 36% 49% 37% 26% 23% Alternative UCITS 19% 25%
Source: 2014 Deutsche Bank Alternative Investment Survey
It is clear that hedge fund managers are providing investors with a variety of different ways to access and utilise alternatives. Our results show that a small, but increasing, number of investors are seeking non-traditional absolute return strategies from their hedge fund providers. Liquid alternatives, co-investment opportunities, hybrid hedge fund/private equity vehicles and seed deals are all utilised by 16% to 19% of the respondent base. Some of the largest allocators responding to the survey pursue co-investment opportunities, with 19% of respondents by number and nearly half of respondents by hedge fund AUM investing in such vehicles.
“The regulation and retailisation of the hedge fund industry will continue apace. This will create significant opportunities for true providers of alpha.”
Sub-billion dollar fund of funds, Asia Pacific
“The hedge fund industry, if there is actually such a thing, is changing considerably. Clients are increasingly thinking of their allocations on a more holistic risk premia basis, which means that allocations are less likely to be bucketed. This, together with a greater recognition of the existence of viable ‘hedge fund beta’ solutions creates much greater pressure on hedge fund managers to deliver products that create something of real value to clients.”
Global investment consultant
The percentage of respondents employing a risk-based approach, or some variation, has increased from 25% to 39% year on year.
What is your preferred approach to asset allocation?
All investor respondents excluding fund of funds and investment consultants:
Traditional approach (equities/bonds/alternatives) Risk-based approach (equity L/S into equity bucket, credit into fixed income bucket etc.)
10% 20% 0% 30% 40% 50% 60% 25% 39% 56% 50% 2013 survey 2014 survey Other 11%19%
Source: 2014 Deutsche Bank Alternative Investment Survey
We did not inquire about investors’ appetite for hedge fund-run long only products in this survey, however we know demand to be both significant and on the rise. Over one third of the investors responding to Deutsche Bank’s recent survey, “From alternatives to mainstream: Hedge funds’ changing role in the asset
management industry,” stated that they invest in long only strategies run by hedge fund managers.21 In the same survey, 43% of all investors reported plans to grow
allocations to non-traditional hedge fund products in 2014.22
The above findings substantiate the trend that the Hedge Fund Capital Group has identified over the past 12 months: the hedge fund business model has changed considerably since the crisis, and those managers that have focused on building long-term, sustainable partnerships with their clients are finding new growth opportunities to service those investors across the portfolio.
While the tremendous alternatives industry growth has been driven by a need for diversification and downside protection, we believe that it has also been underpinned by a structural change in the way that investors utilise alternatives within the
overall portfolio. Since the financial crisis, investors have been gradually breaking down traditional views around portfolio construction and rebuilding more dynamic, diversified programmes that can weather low yielding and uncertain market
environments. The “traditional” bonds, equities and alternatives asset allocation approach has been morphed, advanced and at times abandoned in favour of more optimal and dynamic approaches to portfolio construction, such as a risk-based asset allocation. The result of this change in approach to asset allocation is that a growing number of investors are now incorporating alternatives, including absolute return strategies, into their core portfolios instead of a separate “alternatives” allocation. Given that they lie on the more liquid end of the alternative investments spectrum, hedge funds have understandably received a disproportionate amount of the increased interest in alternatives. As a result of this change, equity long short strategies can be placed within equity portfolios and fixed income absolute return funds as part of the overall fixed income risk budget. By doing so, investors are effectively removing any constraints on percentage allocation to these strategies, and enabling significant growth potential for “alternatives” within the portfolio. The hypothesis is that as institutional investors become ever more comfortable with hedge funds and other alternative investment managers, they will increasingly seek out trusted hedge fund partners to help run not only their alternatives exposure, but their long only portfolios as well.
In light of the above, we asked investors:
21 Deutsche Bank Hedge Fund Capital Group - “From alternatives to mainstream” - November 2013 22 Deutsche Bank Hedge Fund Capital Group - “From alternatives to mainstream” - November 2013
What asset allocation approach do you recommend to your clients?
Investment consultants only:
Other
Risk-based approach (equity L/S into equity bucket, credit into fixed income bucket etc.) Traditional approach (equities/bonds/alternatives)
41%
41%
17%
Source: 2014 Deutsche Bank Alternative Investment Survey
Since we first asked this question last year, the percentage of respondents using a risk-based approach or some variation has increased from 25% to 39%.23 Meanwhile,
the percentage of respondents employing a traditional asset allocation has dropped to 50%, down from 56% last year.24 These results substantiate the claim that investors
are embracing ‘hedge funds’ as absolute return solutions for the portfolio rather than still considering them as a separate asset class. We have observed in our conversations with some of the largest institutional allocators globally that many no longer even refer to these managers as ‘hedge funds’, but rather ‘asset managers’. With 41% of consultants recommending that clients take a risk-based approach to portfolio, and another 17% recommending some sort of variation (e.g. combination of the two approaches), we expect this trend to further materialise over the next 5 years:
23 2013 Deutsche Bank Alternative Investment Survey 24 2013 Deutsche Bank Alternative Investment Survey
58% of consultant respondents recommend that their clients take a risk-based approach or some variation (e.g. combination of two approaches) to asset allocation.
Average percentage allocation to hedge funds by investor type:
30% 20% 10% 0% 40% 50% 60% 70% 80%Allocation to hedge funds, as a % of the total portf
olio Median Mean Family office 35% 45% Endowment/ Foundation 28% 29% 10% 29% Private bank/ Wealth manager 5% 8% Insurance company 4% 21% Pension fund (private and public) Source: 2014 Deutsche Bank Alternative Investment Survey
Error lines indicate one standard deviation from the mean.
Hedge Funds
Hedge fund industry assets grew 17% in 2013, reaching a new all-time high of $2.6bn by year-end.25 $64bn in net new capital flowed into the industry, almost matching the amount raised in
2011 ($70bn) – one of the industry’s strongest years in terms of net new capital raised.26 Amid
buoyant equity markets, a stabilising global economic environment and strong hedge fund performance, investors globally deepened their commitment to hedge fund managers in 2013.
Respondents to this survey manage and/or advise on $1.8tn in hedge fund assets, representing approximately 70% of total industry assets.27 As with alternative
investments, their allocation to hedge funds ranges considerably:
While the average percentage allocation to hedge funds among our sample set is 33%, it varies considerably by investor type and is often skewed by outliers.
Similar to our findings regarding alternatives, the intra-investor differences with regard to investors’ percentage allocations to hedge funds can be easily explained: family offices are as differentiated from each other as the families that they serve, responding investment consultants range from large generalist consultants to hedge fund specialists, and private banks/wealth managers are at very different stages in their retail alternatives offerings. Pension fund allocations to hedge funds have been steadily on the rise for the past several years. Pension fund respondents in this year’s survey have a mean hedge fund allocation of 8%, although the median is slightly lower (5%). This represents a marginal increase from last year, when the mean percentage allocation to hedge funds among our pension fund sample set was 5%.28 While the average percentage allocations may be considered nominal on initial
inspection, the absolute number is significant due to the sheer volume of assets that pension funds manage.
Insurance companies are not large players in the alternatives space relative to the total AUM that they represent. This is largely due to regulatory constraints. Many insurance companies must hold a significant amount of risk-based capital against their hedge fund investments. They are also often limited by the portfolio transparency that they require. As hedge fund managers increasingly offer a variety of ways to access their return streams via managed accounts and liquid alternatives, we suspect that insurance companies will be able to better access hedge funds in the coming years unless the regulatory environment presents further challenges.
25 HFR Industry Reports © HFR, Inc., www.HedgeFundResearch.com 26 HFR Industry Reports © HFR, Inc., www.HedgeFundResearch.com 27 HFR Industry Reports © HFR, Inc., www.HedgeFundResearch.com 28 2013 Deutsche Bank Alternative Investment Survey
The average pension fund respondent has a mean hedge fund allocation of 8% (median of 5%)
Decreased Stayed the same Increased
47%
41%
12%
30% 20% 10% 0% 40% Pension fund (private and public)52%
Private bank/ Wealth manager
52%
Family office Endowment/
Foundation 47% 46% Insurance company 33% 45% 34% 36% 29% 58% 3% 14% 17% 25% 8% 50% 60% 70% 80% 90% 100% Allocation to alternativ
es, as a % of the total portf
olio
Increased Stayed the same Decreased
How has your hedge fund AUM changed during 2013?
All investor respondents:
By investor type:
Source: 2014 Deutsche Bank Alternative Investment Survey
Source: 2014 Deutsche Bank Alternative Investment Survey
47% of responding investors increased their allocations to hedge funds in 2013, including 52% of pension funds. Notably, over half of private banks and wealth managers grew their hedge fund AUM in 2013. It is important to highlight that only 19% of private banks/ wealth managers did so in 2012 – an indication that demand from this investor group is relatively recent, having remained relatively low in the years following the crisis.30
Interestingly, only a third of insurance companies responding to the survey grew hedge fund AUM in 2013, however we note that this comes after two thirds did so in 2012.31
Qualitative evidence provides reason to believe that these long-term investors remain active investors in absolute return strategies.
47% of responding investors increased their hedge fund AUM in 2013, including 52% of pension funds.
30 2013 Deutsche Bank Alternative Investment Survey 31 2013 Deutsche Bank Alternative Investment Survey
15% 10% 5% 0% 20% Decre ase b y 50m n or m ore Decre ase b y les s tha n 50m Do no t exp ect to chan ge Increa se by less than 50m Increa se by 50-10 0m Increa se by 100-2 50m Increa se by 250-5 00m Increa se by 500-7 50m Increa se by 750 -1bn Increa se by 1bn o r more 1% 3% 19% 12% 34% 12% 10% 2% 4% 2% 25% 30% 35% 40%
How do you expect your hedge fund AUM to change in 2014 (USD)?
Source: 2014 Deutsche Bank Alternative Investment Survey
Results from our survey reveal that investors are bullish on their hedge fund allocations for 2014. 62% of investors plan to grow their hedge fund AUM in 2014, including 30% who plan to do so by more than $100m. Pension funds lead the way in terms of expected allocations, with 62% of pension fund respondents planning to grow their hedge fund AUM in 2014, including 35% who plan to allocate between $100m and $500m and another 19% who plan to allocate over $500m. We expect that pension funds’ increasing contribution to hedge funds will continue to drive industry growth in the coming years, and serve as a bellwether for other institutional investors. With 41% of insurance companies planning to add more than $100m to hedge funds, we expect these institutional allocators to contribute further to industry growth in 2014.
Over 80% of private banks and wealth managers are looking to grow their hedge fund AUM over the next 12 months, after half increased their allocations during 2013. This includes 45% who plan to increase by more than $100m over the next 12 months. As we discussed on page 16, we expect that the majority of these flows will be directed towards liquid alternatives, namely alternative UCITS and alternative ’40 Act mutual funds, for the reasons previously stated.
62% of responding investors plan to grow their allocations to hedge funds in 2014, including 30% who plan to grow their allocations by more than $100m.
15% 10% 5% 0% 20% Inflow of m ore th an 40 0bn Inflow of 30 0-400 bn Inflow of 20 0-300 bn Inflow of 15 0-200 bn Inflow of 10 0-150 bn Inflow of 50 -100b n Inflow of 0-50bn Outlfo w of 50-10 0bn Outflo w of 100-1 50bn Outflo w of 150-2 00bn 7% 10% 20% 23% 17% 11% 6% 3% 1% 1% Outflo w of more than 200b n 1% 25%
The hedge fund industry is expected to be around $2.51* trillion in size
as of end of Q3 2013. What is your estimate for the net inflows/outflows
for 2014 (USD)?
*Deutsche Bank estimates
Source: 2014 Deutsche Bank Alternative Investment Survey
32 HFR Industry Reports © HFR, Inc., www.HedgeFundResearch.com; 2013 Deutsche Bank Alternative Investment Survey
2013 proved to be a positive year for the hedge fund industry, surpassing investors’ expectations set forth in last year’s survey. The industry grew by 17%, reaching an all-time high of $2.6tn by year-end and exceeding the $2.5tn predicted by our global investor base in December 2012.32
On a weighted average basis, investors in this year’s survey are predicting $171bn of net new capital to flow into the industry, which would result in a total asset growth of 7% before performance. If 2014 goes as predicted, with increased participation from institutional investors and performance-related gains of 7.3% (or $191bn) (see page 30), the industry is predicted to grow to $3tn (delta of 14%) in hedge fund assets by year end.
The hedge fund industry reached a new all time high of $2.6tn in 2013, surpassing investors’ expectations set forth in last year’s survey.
Survey respondents predict that the industry will reach $3tn by 2014 year end.
Predictions for hedge fund industry AUM in 2014
Performance trends
& predictions
Section Highlights
2013 cumulative performance dispersion by strategy
75th Median Average 25th MSCI World
35.00% 10.00% 5.00% 20.00% 15.00% 30.00% 25.00% 0.00% -5.00% -10.00% -15.00% -20.00% 40.00% CT A / Managed Futures Macr o Fix ed Income Credit All Funds Multi-Strategy Emerging Mark ets Equity CB & V ol Arb Mark et Neutral Ev ent Driv en Distressed Equity L/S
Source: Author’s own analysis using Hedge Fund Intelligence data, January 2014
− 80% of respondents state that hedge funds performed as expected or better in 2013, compared to 62% for 2012.33
− Investors target performance of 9.4% for their hedge fund investments in 2014, having achieved a weighted average return of 9.3% this past year.
− Stable and consistent returns remain key for investors: 91% of respondents target single digit volatility in 2014.
− Fundamental equity long/short, event driven and global macro are predicted to be the best performing strategies in 2014, while North America, Western Europe and Japan are expected to be the top performing regions.
Against a backdrop of a strong rally in risk assets globally, it is encouraging to see that allocators are satisfied with the 2013 performance of their hedge fund investments. 2013 was a relatively difficult trading environment for hedge fund managers, with continued low interest rates and considerable political intervention. With central bank liquidity being the main driver of asset prices, it was particularly challenging for both global macro and quantitative hedge funds. On the other hand, the rally we saw in the equity markets and strong performance from equity long/short managers helped to restore investor confidence. As the IPO and M&A markets heated up, event driven managers became increasingly active and generated some solid performance numbers. Indeed it is pleasing to note that last year’s respondents expected these two strategies to be top performers in 2013: 53% believed that equity long/short managers would outperform, and a further 36% said the same for event driven managers.34
33 2013 Deutsche Bank Alternative Investment Survey 34 2013 Deutsche Bank Alternative Investment Survey
“Hedge funds may be entering the best possible environment one could ask for - prospect for higher global rates, increased volatility, solid dispersion and equity markets hard pressed to maintain this past year’s momentum.”
$10bn+ fund of funds, North America
Average hedge fund portfolio returns for 2013
How has your/your average client’s hedge fund portfolio performed year to
date 2013? What is the target return for 2014?
All investor respondents:
All investor respondents:
30% 20% 10% 0% 40% 50% 60% 70% 2013 return 2014 target Less than 0% 0.5% 0-5% 9% 2% 6-10% 51% 61% 11-15% 33% 35% Greater than 20% 1% 1% 16-20% 5% 1% 30% 20% 10% 0% 40% Private bank/ Wealth manager 7% 41% 7% 8% 45% Family office 5% 50% 35% 2% Investment consultant 57% 43% Endowment/ Foundation 8% 46% 46% Pension fund (private and public)
20% 61% 19% Insurance company 75% 25% Asset manager/ Fund of funds 5% 50% 50% 12% 29% 50% 60% 70% 80% 90% 100%
Less than 0% 0-5% 6-10% 11-15% 16-20% Greater than 20% 6%
Source: 2014 Deutsche Bank Alternative Investment Survey
Source: 2014 Deutsche Bank Alternative Investment Survey
While manager selection continues to be a critical driver of returns, 2013 performance was largely driven by strategy selection. There was certainly dispersion with equity long/short performance, however investors who shifted allocations into equity over the course of the year generally felt that they had made the right call. Given the dispersion of returns seen in 2013, we were curious to ask our investor base how their portfolios finished the year and what returns they were targeting for 2014.
In four years, the percentage of respondents targeting double digit returns for their hedge fund portfolio has dropped from 52% to 37%.
Analysis of investors’ risk/return targets:
Source: 2014 Deutsche Bank Alternative Investment Survey
Investor type 2013 target
(%) 2013 actual returns (%) 2014 returns target (%) 2014 volatility target (%)
Family office 10.06 10.04 10.29 7.08 Asset manager/ Fund of funds 9.13 9.11 9.67 6.49 Private bank/ Wealth manager 9.40 10.09 8.88 6.98 Investment consultant 9.83 9.67 8.83 7.17 Endowment/ Foundation 8.75 9.38 8.75 7.08 Insurance company 8.09 8.75 8.75 7.08 Pension fund
(private and public) 7.97 7.50 7.81 6.25
All respondents 9.20 9.29 9.43 6.74
In our 2013 survey, the weighted average return target for investors’ hedge fund portfolios was 9.2%.35 It is therefore pleasing to see that this target was met by this
year’s respondents, who achieved a weighted average performance of 9.3% for their hedge fund allocations in 2013 (versus a return of 6.2% in 2012).36 This figure is in line
with the HFRI Fund Weighted Composite Index, which returned 9.24% in 2013.37
Upon further analysis, we note that all investor types were within ±70bps of their performance target set last year. The private banks and wealth managers had the
strongest absolute performance (10.09%), followed closely by the family offices (10.04%). Pension funds had the lowest performance (7.50%), which we believe is driven by several factors. Firstly, many pension funds consider their hedge fund allocation as a diversifier for their relatively large long only equity exposure. As a result, many do not allocate to directional equity long/short strategies and thus would not have benefitted from the strong gains of the past year. Secondly, pension funds tend to seek a much lower risk/ return profile than their ’non-institutional’ peers managing private wealth or family money, as illustrated by the table above.
When hedge fund performance targets were set for 2013, it is safe to say that investors were not predicting the strong market rally that we went on to experience. Indeed they predicted 6.4% returns for S&P 500, versus 29.60% actual returns.38 With this in mind,
we asked:
35 2013 Deutsche Bank Alternative Investment Survey 36 2013 Deutsche Bank Alternative Investment Survey
37 HFR Industry Reports© HFR, Inc., www.HedgeFundResearch.com
38 Reuters “US stocks - Wall St ends best year since 1990s with moderate gains” – 31 December 2013
Respondents’ weighted average hedge fund return in 2013 was 9.3% versus 6.2% in 2012.
How do you rate performance for 2013?
All investor respondents:
Source: 2014 Deutsche Bank Alternative Investment Survey
In last year’s survey, respondents had predicted high single digit returns for the equity markets. Given that the S&P 500 and the MSCI World returned 29.60% and 22.50% respectively for the year, it follows that the vast majority of respondents felt that returns for both indices were better than expected.39 Real estate globally continues to thrive in
the low interest rate environment, and 29% of investors felt their real estate performed better than expected in 2013. We were pleased to see funds of funds perform well, with 78% of investors who allocate to them stating that their fund of funds providers either met or exceeded expectations this year. Indeed those firms that have been able to adapt their business models successfully to the new environment are finding innovative ways to service institutional investors (see page 103).
Despite the wide dispersion in hedge fund returns from 2013, investors appear generally satisfied with the risk-adjusted absolute gains achieved by their hedge fund portfolios during year. 80% of investors state that their hedge fund investments performed as expected or better in 2013. This compares to 62% of respondents who said the same last year (13% stated that hedge funds outperformed, while 49% stated that they performed as expected).40
Allocators clearly value the hedge fund proposition as a returns stream diversifier, and as a source of alpha as opposed to a pure beta play. As long as hedge fund performance continues to meet or surpass investors’ expectations, investor confidence in absolute return or long only products run by alternative managers will continue to grow. Boards will become increasingly comfortable with hedge fund managers as portfolio solutions providers and asset managers, and utilise them as a complement to or in place of their long only exposure run by traditional asset managers. The view that hedge funds are a separate asset class to be bucketed into a separate part of the portfolio continues to wane, and investors will increasingly see hedge funds as another tool they can use within their core portfolio, much like ETFs, mutual funds and long-only funds. In fact, with many institutional allocators moving towards a risk-based approach to portfolio construction, this trend is already well on its way (see pages 17 and 95).
80% of investors feel that their hedge fund portfolio performed as expected or better in 2013.
39 Bloomberg data
40 2013 Deutsche Bank Alternative Investment Survey
30% 20% 10% 0% 40% S&P 5 00 93% 7% MSCI World 17% Long -only 74% 22% 4% Real e state Hedg e fun d Infras tructu re Altern ative U CITS Altern ative ‘4 0 Act Altern ative b eta Comm oditie s 20% Privat e equ ity 55% Fund s of fu nds 61% 50% 60% 70% 80% 90% 100%
Better than expected In line with expectations Worse than expected 24% 23% 81% 2% 29% 14% 16% 15% 18% 8% 63% 54% 22% 12% 20% 14% 23% 69% 60% 65% 30% 53% 29% 33% 66%
Target hedge fund portfolio returns for 2014
All investor respondents:
Source: 2014 Deutsche Bank Alternative Investment Survey
The weighted average performance target for respondents for 2014 is 9.4%. The fact that investors’ performance targets have not changed significantly year on year (the weighted average return target in last year’s survey was 9.2%) demonstrates that the objective of the majority of investors’ hedge fund allocations is to achieve consistent risk-adjusted absolute returns, as opposed to outperformance of a particular index or asset class or outsized double digit returns.
Family offices have traditionally valued performance over capital preservation for their alternatives allocation. They tend to be dynamic with the allocation process, putting capital to work opportunistically in investments that offer the most attractive returns. The perceived opportunity cost for their hedge fund investments is therefore relatively high and they will naturally have the most aggressive performance targets. Given the extra layer of fees charged, it is not surprising that asset managers/funds of funds also have relatively high performance targets. On the other hand, pension funds and insurance companies value their hedge fund investments for the downside protection that they can offer, and are willing to give away some of the upside in order to achieve diversification in periods of heightened volatility.
By investor type, family offices are the least satisfied with performance of their hedge fund allocations, with 39% stating that they performed worse than expected in 2013. As discussed earlier, family offices have the highest performance targets (see page 26) and are likely to be the most flexible in terms of their asset allocation. They therefore tend to be the most sensitive to the opportunity cost of their hedge fund investments. Given the strong market rally, it is no surprise that they feel that this year the opportunity cost was particularly high. 30% 20% 10% 0% 40% Family office 47% 52% 2% Asset manager/ Fund of funds 57% 37% 2% 2% Private bank/ Wealth manager 72% 28% Investment consultant 73% 27% Pension fund (private or public) 20% 81% 6% 13% Insurance company 75% 25% Endowment/ Foundation 67% 29% 50% 60% 70% 80% 90% 100%
Less than 5% 5-10% 11-15% 16-20% Greater than 20% 4%
2% 63% of investors are
targeting single digit returns for their hedge fund portfolio in 2014.
The weighted average performance target for respondents’ hedge fund portfolios is 9.4%.
What is your/your clients’ target volatility for the hedge fund portfolio?
All investor respondents:
30% 20% 10% 0% 40% Less than 5% 26% 5-10% 61% 11-15% 11% 16-20% 2% 50% 60% 70% 2013 survey 2014 survey 25% 65% 8% 1%
Source: 2014 Deutsche Bank Alternative Investment Survey
90% of responding hedge fund allocators are seeking single digit volatility in 2014, a slight increase from 87% last year.41 This dispels the popular, but somewhat outdated, belief that
hedge funds are utilised for punchy, outsized returns. As mentioned earlier, it is clear that, for the majority of respondents to this survey, the role of hedge funds within the portfolio is in fact return stream diversification. Sophisticated hedge fund investors do not necessarily view hedge funds as a separate asset class, but instead as a superior risk-adjusted method of accessing returns.
As seen on the table on page 26, pension funds have the lowest volatility targets (6.25%). This is as expected, given our previous discussion around the value of diversification and risk-adjusted returns for this investor group. At the other end of the scale, family offices, wealth managers and private banks are targeting slightly higher volatility and return profiles. It is interesting to note that, while they have the second highest return target, the asset managers/funds of funds have the second lowest volatility targets (6.49%). If they are able to deliver on these targets, they will clearly be offering a compelling product for their clients.
41 2013 Deutsche Bank Alternative Investment Survey
90% of respondents are targeting single digit volatility for their hedge fund portfolio in 2014.
What returns do you forecast for 2014?
All investor respondents:
30% 20% 10% 0% 40%
MSCI Emerging Markets 22%
MSCI World 11%
S&P 500 HFRI Hedge Fund Weighted Composite Index
14% 15% 41% 60% 56% 75% 31% 6% 26% 28% 10% 50% 60% 70% 80% 90% 100% Less than 5% 5-10% 10-15% 15-20%
Source: 2014 Deutsche Bank Alternative Investment Survey
Source: 2013 Deutsche Bank Alternative Investment Survey; Bloomberg; MSCI Press Release: MSCI Indixes 2013 Performance Results; 2014 Deutsche Bank Alternative Investment Survey
Respondents to last year’s survey predicted high single digit equity market returns for 2013.42
Despite ongoing economic and political challenges globally, equity markets significantly outperformed expectations. Looking forward to 2014, it appears that investors are not expecting a global systemic risk event. Indeed if global growth continues to trend towards normal and central banks remain accommodating, markets may well continue to trend upwards, albeit at a slower pace than seen last year. In addition, based on asset flows alone the Deutsche Bank Asset Allocation team has calculated that $169bn in pent-up cash and short interest due to taper fears may make its way into the market over the next few months despite the rally already seen in equities globally.43
42 2013 Deutsche Bank Alternative Investment Survey
43 Deutsche Bank Research – Investors Positioning and Flows: Pent-Up Demand? – December 2013
Industry predictions
Having analysed investor sentiment around last year’s performance, we now look ahead to 2014 to see what investors are predicting both for the global financial markets and hedge fund indices, and provide a detailed analysis of their strategy predictions for the year.
2013 prediction
(2013 survey) performance2013 prediction2014
S&P 500 8.3% 29.60% 8.4%
MSCI World 8.3% 22.50% 8.5%
MSCI Emerging Markets 10.4% -5.67% 8.6% HFRI Fund Weighted
Composite Index 7.5% 9.24% 7.3%
Investors predict that the HFRI Fund Weighted Composite Index will return 7.3% in 2014.
44 2013 Deutsche Bank Alternative Investment Survey; Deutsche Bank Research – The House View – Outlook 2014 – January 2014 45 2012 Deutsche Bank Alternative Investment Survey; 2013 Deutsche Bank Alternative Investment Survey
30% 20% 10% 0% 70% 60% 50% 40% Fund amen tal eq uity l ong/s hort Even t driv en Glob al m acro Struc tured cred it Fund amen tal eq uity m arket neutr al CTA / Man aged Futur es Syste mati c equ ity m arket neutr al (in cl. st at arb ) Quan t Conv ertibl e arbi trage Tail-r isk pr otecti on 70% 68% 19% 14% 39% 14% 7% 4% 3% 3% 3% 3% 2% 1% 1% 13% 10% 8% Altern ative beta Emerg ing m arkets Distr esse d Mult i stra tegy Credit Volat ility t rading Fixed inco me ( rates ) Com mod ities FX tra ding Other 8% 11% 80%
Which 3 hedge fund strategies do you predict will perform BEST in 2014?
All investor respondents:
Source: 2014 Deutsche Bank Alternative Investment Survey
70% of respondents (versus 53% in 2013) place fundamental equity long/short strategies within their top three top strategies to watch in 2014. With the end of QE and an unexpected increase in volatility and dispersion, 2014 may prove to be more of a stockpicker’s market.44 With the IPO market heating up in 2013 and an active M&A
market expected in 2014, 68% of investors expect event driven funds to be particularly interesting this year. Global macro fell from #1 in 2012 to #6 in 2013.45 It is interesting
to see it move back up the leader board to take third place this year. This is presumably because investors believe that economic fundamentals, as opposed to political rhetoric, are going to have a greater influence on global asset prices over the next 12 months.
Fundamental equity long/short and event driven are predicted to be the top 2 best performing strategies in 2014.
Which 3 hedge fund strategies do you predict will perform WORST in 2014?
All investor respondents:
15% 10% 5% 0% 35% 30% 25% 20% Tail-r isk pr otecti on Com mod ities CTA / Man aged futur es Fixed inco me ( rates ) FX tra ding Syste mati c equ ity m arket neutr al (in cl. st at arb ) Altern ative beta Distr esse d Struc tured cred it Mult i stra tegy 41% 31% 27% 24% 31% 19% 12% 11% 10% 9% 5% 4% 3% 3% 1% 17% 13% 12% Even t driv en Cred it Volat ility t rading Emerg ing m arkets Conv ertibl e arbi trage Quan t Glob al mac ro Fund amen tal eq uity l ong/s hort Fund amen tal eq uity m arket neutr al Othe r 13% 14% 40% 45%
Source: 2014 Deutsche Bank Alternative Investment Survey
Given that fears of a global systemic risk event have somewhat subsided, one would expect tail-risk protection to underperform: 41% of respondents placed this in their top three worst performing strategies for 2014. With expectations of positive US growth, and therefore a strong USD, coupled with falling oil prices due to shale production and falling gold prices due to a return in “risk-on” sentiment, it is no surprise that 31% of investors expect commodity strategies to be among the top three worst performing strategies in 2014. Finally, after a few challenging years performance-wise, CTA/managed futures come in third place. That said, anecdotally the team has noted that those investors who place particular value on the role of CTAs within the overall portfolio remained committed to the strategy for the low correlation benefits that it can provide.
Despite relatively bearish sentiment for CTA, investors do not underestimate the importance of investment diversification for risk management.
How have investor performance predictions fared in 2013?
Predicted in 2013 survey (ranking from 1 = best, 13 = worst) Global macro
2013 performance (1 = best, 13 = worst)
12 2 1 12 4 3 6 5 0 0 11 10 9 8 7 13 11 10 9 8 7 6 5 4 3 2 1 13 CTA Merger Arb Convertible Arb Distressed Emerging markets Credit long/short Outperformed expectations ABS Event-Driven Equity L/S Market neutral Multi-Strategy Commodities Underperformed expectations
Analysis of 2013 performance predictions
Source: 2014 Deutsche Bank Alternative Investment Survey
We have analysed how strategies have performed, based on HFR index returns, relative to the return expectations of investors in last year’s survey. We have assigned a score to each strategy based on its predicted performance (1 = best, 13 = worst), and have also ranked 2013 performance in order. Based on this, 6 strategies have underperformed investor expectations, 2 have met expectations and 5 have outperformed.
Five of the six underperforming strategies were predicted to be the best performing strategies in 2013. The largest disparity between expected and actual performance was for global macro, for the second year in a row. Given the unpredictability of the macro environment and increased central bank intervention, it has been particularly hard for macro managers to perform as expected for the last couple of years. Equity long/ short was predicted to be the best performing strategy last year by investors, and the managers running this strategy lived up to investors’ expectations, thereby proving the value they add to the investors’ portfolios .
Convertible arbitrage outperformed investor expectations by the widest margin in 2013 as it was predicted to be the worst performing strategy in our survey last year. It will be interesting to see if this year investors start looking at single strategy convertible arbitrage managers or if their preference will continue to be multi-strategy managers who can be more nimble when it comes to converts. We expect this to be a space to watch in 2014.
Which 3 regions do you predict will perform BEST in 2014?
All investor respondents:
30% 20% 10% 0% 70% 60% 50% 40% Unite d Stat es / C anad a Wes tern E urope Japa n Asia includ ing Ja pan Easte rn an d Cen tral E urope (ex-R ussia ) BRIC Midd le Ea st / N orth A frica South Afric a 68% 64% 21% 18% 55% 16% 5% 2% 11% 8% 6% China Asia ex-Ja pan Sub-S ahara n Afric a India Russia 7% 9% 80%
Source: 2014 Deutsche Bank Alternative Investment Survey
With an improved economic outlook, including continued job market recovery and a noticeable housing recovery, 68% of investors believe that North America will be amongst the top performing regions in 2014. Indeed at the time of writing the Deutsche Bank forecast of 3.5% growth for the US in 2014 is +0.9pp above Bloomberg global growth consensus.46 With fears of a Eurozone break-up somewhat dissipated for the
time being, Western Europe remains in second place after its debut in the top three last year.47 After its stellar performance this year, respondents continue to have faith in
“Abenomics”. 55% of respondents expect that the Nikkei has further to go, which is likely given the incremental $550bn that is expected to be added to the Bank of Japan’s balance sheet this year.48 After many China long/short managers successfully beat the
index in 2013, 21% of investors highlight it as a potential outperformer again in 2014.
46 Deutsche Bank Research – The House View – Outlook 2014 – January 2014 47 2013 Deutsche Bank Alternative Investment Survey
48 Deutsche Bank Research – The House View – Outlook 2014 – January 2014
Japan makes its debut in the Top 3 predicted best performing strategies for 2014.
15% 10% 5% 0% 35% 30% 25% 20% India 39% Latin Am erica 38% BRIC 29% Russ ia 31% Asia includ ing Ja pan 2% Asia ex-Ja pan 9% Midd le Ea st / N orth A frica 24% Sub-S ahara n Afric a 16% Unite d Stat es / C anad a 10% 31% South Afric a 28% Easte rn an d Cen tral E urope (ex-R ussia ) 10% Japa n Wes tern E urope 13% China 19% 40% 45%
Which 3 regions do you predict will perform WORST in 2014?
All investor respondents:
Source: 2014 Deutsche Bank Alternative Investment Survey
With upcoming elections in India, Brazil and South Africa in 2014, investors are expecting the financial markets to be somewhat volatile in these respective countries or regions. India is in top place, which is unsurprising if you consider that it is trading at a premium to many other Asian countries and is also suffering from a lack of regulatory clarity across several sectors. It is interesting to note that by the time of writing this report, several of these markets have already undergone very volatile trading days, with large moves to the downside.
Section highlights
− On an hedge fund AUM weighted basis, fundamental equity long/short (53%) and event-driven (53%) strategies are the most sought after strategies in 2014.
− Investors continue to find global macro the most challenging strategy to source.
− On an hedge fund AUM weighted basis, net allocation plans are highest for Western Europe (36%), Japan (29%) and US/Canada (23%).
− The most difficult regions to source are Sub-Saharan Africa, Middle East/North Africa and China.
In last year’s survey, equity long short and event driven were 2 of the top 3 most sought after strategies for 2013, with a net 43% and 36% of investor respondents, respectively, planning to add to these strategies during the year.49 Strong performance from both
these strategies meant that investors’ plans materialised into significant flows: event-driven strategies, which returned +12.5% for 2013, were the largest recipient of net new capital in 2013, raising $30bn.50 Significant performance-related gains ($111bn) and net
inflows enabled event driven funds to replace relative value arbitrage as the 2nd largest strategy group by hedge fund AUM.51 Meanwhile, equity hedge had its best performance
since 2009 (+14.4%) and raised $18bn in net new capital, allowing it to maintain its place as the largest strategy by hedge fund capital.52
Emerging markets was the 2nd most sought after strategy in 2013, although actual flow data was not available at the time of writing for comparison.
In the previous section, we analysed investors’ asset flow and performance predictions for 2014. We now look at how they are planning to allocate their capital in 2014. We analyse allocation plans by strategy and by region according to hedge fund AUM (rather than by number of respondents), in order to give an asset-weighted representation of predicted flows. For full information by both number and hedge fund AUM, please see pages 42 to 50.
49 2013 Deutsche Bank Alternative Investment Survey
50 HFR Industry Reports © HFR, Inc., www.HedgeFundResearch.com 51 HFR Industry Reports © HFR, Inc., www.HedgeFundResearch.com 52 HFR Industry Reports © HFR, Inc., www.HedgeFundResearch.com
