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Credit Suisse Releases Annual Hedge Fund Investor Survey
The survey, which was compiled by Credit Suisse’s Prime Services business, aggregates the views of a diversified cross-section of hedge fund investors, including pension funds, consultants, family offices and funds of hedge funds (FOHFs).
“Our Global Investor Survey, taken together with our corresponding Global Hedge Fund Manager Survey published last month, adds important new data and analysis to help both managers and investors to better understand the new phase that the industry has entered. The twin surveys provide unique insight into where the views of managers and investors have converged, as well as those areas where their views still diverge,” said Edgar Senior, Managing Director and Head of Capital Services at Credit Suisse in London.
One area where managers and investors agree is general optimism about the growth prospects for the hedge fund industry this year. Hedge fund investors estimate that the industry will grow from an estimated USD $1.64 trillion at the end of 2009 to USD $1.97 trillion by the end of the year, which is above the pre-crisis peak and almost identical to the year-end forecast from managers. Investors intend to increase their own hedge fund allocations by an asset-weighted average of 9% of their current levels, which is USD $148 billion if extrapolated across the industry, implying expectations that performance will account for roughly 11% growth in industry size this year.
Another topic of congruence in the views of managers and investors is industry economics. As a clear indicator of a trend towards compromise between investors and managers in the pursuit of mutual profitability, almost two-thirds of respondents believe that investors who agree to lock-up their capital for longer are likely to receive a reduction in “market standard” fees, a view that is shared by two-thirds of the managers that participated in the corresponding manager survey.
The survey also polls investors on their investment plans, with the two most popular strategies this year being Global Macro (67% of investors increasing allocations), which had also been in pole position one year ago, and Event-Driven strategies (62% of investors increasing allocations), which had a net outflow forecast a year ago, but has been one of the most talked about strategies in 2010. The leader by geographic focus is Asia-Pacific focused strategies, with 61% of investors increasing allocations.
“This appetite for Asia-Pac is a clear illustration of the strong recovery in investors’ risk appetites and search for returns, as investors had actually planned net decreases to Asia-Pac at this time last year,” said Mr Senior. “This reversal was confirmed by the record attendance at our Hong Kong Hedge Fund forum recently, where sentiment was dramatically more positive than in March 2009.”
Other noteworthy findings on investors’ appetites include:
• Investors are open to new launches, but discriminating: 65% of investors could allocate “day one” to a new launch of a carved-out strategy within an existing firm, whereas only 28% of investors could allocate similarly early to a manager starting an entirely new venture with no explicit track record
• Investors have been influencing changes in redemption terms: 43% have demanded an increase in redemption frequency, and 39% have requested a removal of hard lock-ups for new investors
• Investors are increasingly expecting redemption terms to be tied to underlying portfolios: only 25% are open to investing with a 90-day redemption notice period for “higher liquidity” strategies, whereas 72% are comfortable with 90-day notice for “lower liquidity” funds.
Turning from “what” investors will invest into, and towards “how”, the survey reveals that 65% of investors have made their due diligence process significantly or somewhat longer and more in-depth than pre-2008. Similarly, 94% of investors have been receiving more transparency into managers’ portfolio positioning over the last 18 months than previously. As alternative means to mitigate the non-economic risks of hedge fund investing, managed accounts and “UCITS hedge funds” both attracted strong investor interest, with 39% of investors intending to increase their exposure to managed accounts and 38% to UCITS hedge funds, justifying the significant amount of interest from managers in both topics.
Mr Senior said: “We are very pleased that the results of our two global surveys indicate that the hedge fund industry is entering its next growth phase, with new standards and new investment vehicles attracting investor capital back in, and also giving new investors the confidence to start to allocate. Of equal importance, we believe that they establish a shift towards a more sustainable model where managers and investors have a deeper understanding of each others’ goals and perspectives, and negotiate appropriate terms and structures for mutual benefit. This gives us even more confidence about the future prospects of the hedge fund industry – not just more inflows, but more sustainable inflows.”