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Pro Analysis

Breakingviews: Hedge funds may be in for another tough year

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Creative destruction in the hedge fund business has further to go. Investors are trimming the number of funds they put money in, according to a bank survey. Yet even if investors in the $3 trillion industry are getting choosier, many are still spread too thin.

Years of mediocre returns and high fees are coming home to roost. Clients withdrew $70 billion from the industry last year, the largest outflow since 2009, according to Hedge Fund Research. Just over half the respondents in Deutsche Bank's annual survey, who allocate or advise on $1.9 trillion of hedge-fund investments, expect the industry to see net outflows again this year. Yet fully 83 percent plan to maintain or increase their own allocations.

The optimism may be grounded. With the Federal Reserve raising rates and stocks on a tear, returns are rising and correlations falling between industry sectors and asset classes. That should make it easier for managers to bet on changes in share prices, or the relative moves of stocks, bonds, currencies and commodities. Not surprisingly, macro trading, which bets on changes in economic policies and capital flows, is the most sought-after strategy, according to Deutsche's survey.