Institutions Including Family Offices See Strong Hedge Fund AuM Growth - Credit Suisse

Tom Burroughes

11 March 2014

A survey of institutions including family offices shows that they expect assets under management in the globe’s hedge fund industry to rise 12 per cent in 2014 to a record level of $2.8 trillion, a faster growth rate than in 2013.

The survey, produced by the Swiss bank’s Capital Services Group, drew responses from more than 500 organizations such as pension funds, endowments, family offices and funds of hedge funds. Together, respondents oversee a total of $1.6 trillion of assets.

“If accurate, this updated forecast would mean at least an additional $300 billion for the industry in 2014, coming from both performance and new capital inflows. Investors were also more optimistic about performance of the overall hedge fund industry, increasing their expectations for returns this year,” Robert Leonard, managing director and global head of Capital Services at Credit Suisse, said.

“In this year’s survey we witnessed some dramatic swings in investor preferences, such as the increase in appetite for event-driven strategies, while interest in emerging markets strategies declined. Additionally, there were also strong shifts along regional lines, as investors indicated a higher level of interest in both Europe and Japan,” Leonard continued.

“At the same time, investors are also cognizant of potential issues such as capacity constraints and a crowded trading environment that could affect the industry in the coming year,” he added.

Among the details of the survey, was the finding that interest in event driven strategies (such as those seeking to profit from mergers and other events) reflected the greatest year-on-year increase in demand, nearly doubling from the prior year. The survey found that no respondents expect to cut allocations to the strategy. On the other hand, this level of increased interest was matched in magnitude only by the drop in appetite for emerging markets, which fell “precipitously”, the survey found.

Despite modest returns for the past two years, global macro (where funds seek to make directional bets on broad economic trends) remained an area in favour and it is forecast to be among the top three best performing strategies in 2014.

When asked about the impact of fee reductions, investors cited a strong preference for management fee discounts to incentive fee discounts by a magnitude of 3:1. The inclusion of hurdle rates was also highlighted by a third of investors as their preferred fee structure incentive.

In terms of regional preferences, Developed Europe (43 per cent) and Japan (33 per cent) were the clear winners, with the largest net demand from investors going into this year. North American strategies also enjoyed a positive view from investors with 15 per cent net demand, up marginally from the 2013 survey. The view on Emerging Markets was less positive, with only 10 per cent net demand, reflecting a notable decline from the 42 per cent demand cited in last year’s survey, the bank added.