Following an extensive survey of hedge fund investors, Deutsche Bank concluded there are 10 reasons to be positive about the industry
“Bullish sentiment on market performance, flows and industry dynamics were the clear messages conveyed by the investors,” Anita Nemes, global head of capital introduction at Deutsche Bank, said.
“Provided the industry is not affected by events that generate negative publicity and headline risk (factors which institutional investors in particular cannot tolerate), we believe the industry is poised to continue to become a more and more significant part of the asset management industry," Nemes said.
Nemes highlighted 10 factors that will drive the hedge fund industryforward over the next 12 months and beyond.
- All-time highs predicted for hedge fund industry. Based on performance and net inflow expectations, the hedge fund industry is expected to reach $2.25 trillion by the end of 2011.
- Inflows to quadruple in 2011. Investors expect inflows of 210 billion in 2011. This is nearly four times the amount seen in 2010 and represents industry growth in excess of 10 percent of its current size.
- More cash put to work. Investors expect to reduce their cash position over the next six months by $29 billion dollars, 75 percent of investors expect to hold less than 5 percent cash by June 2011.
- Institutions increasing allocations and size of teams. More than 70 percent of pensions and more than half of all consultants are increasing their dedicated hedge fund teams.
- Consultants report significant new interest. Consultants are increasing the number of clients to whom they provide advice on hedge funds. Furthermore, 82 percent of consultants are seeing their clients increasing the proportion of their portfolios in hedge funds in 2011.
- Substantial asset growth for funds of fundsthat have adapted to the new environment.
- Investors have their money back. The majority of investors have no, or relatively few, investments with managers that still have positions sidepocketed, are still gated or have still suspended redemptions.
- Stocks are top pick for investors. Bullish sentiment on stockstranslates into hedge fund performance predictions, with long/short equity predicted to be best performing strategy.
- Significant growth opportunities for smaller funds. Investors no longer only look at the $5 billion plus club. Sixty-five percent of investors anticipated the average size of hedge funds to which they would allocate in 2011 would be below $1 billion, with many suggesting a focus on managers with assets under management of $500 million- $1 billion.
- The entrepreneurial spirit is back. More than 50 percent of investors will invest Day 1, compared to only 20 percent in 2004. Seeding activity and size of seed deals are expected to increase.