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Anita Nemes, Global Head of Capital Introduction at Deutsche Bank

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Deutsche Bank’s 10th anniversary Alternative Investment Survey shows institutional commitment to hedge funds ‘is not wavering’, says Nemes

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Investors predict an estimated net inflow of USD140 billion in 2012 according to the latest Alternative Investment Survey (AIS) conducted by Deutsche Bank, which, if true, will push industry AUM to an all-time high of USD2.26trillion.

Barry Bausano, Co-Head of Global Prime Finance and Head of Equities in the Americas was quoted as saying: “Investors are committed to top performing managers, with cash holdings potentially adding an extra USD39bn to the industry over the next six months.” 

This year marks the 10th anniversary of the influential AIS, conducted in December 2011 by Deutsche Bank’s Global Prime Finance business. Approximately 400 global investors representing more than USD1.35 trillion in hedge fund assets took part in the survey, and the message seems to be clear: institutions remain committed to investing in the hedge fund space.   
 
In light of it being its landmark 10th edition, over which time the industry has enjoyed meteoric growth with industry assets soaring from USD625billion in 2002 to USD2.01trillion at the end of 2011, Deutsche Bank has picked out 10 trends to watch in 2012. Aside from continued asset growth, institutions are likely to play an evermore important role, consolidation will make the big funds even bigger, flexible fees will become the norm, and seeders will be a key catalyst for industry growth.
 
Hedgeweek spoke with Anita Nemes (pictured), Global Head of Capital Introduction at Deutsche Bank, on some of these key findings. Nemes said that for the 10th year in a row, performance is key. 2011 was a major challenge for hedge funders, many of whom ended the year in negative territory. Despite this, the AIS found that 80 per cent of institutional investors either grew or maintained their hedge fund holdings. As Nemes rightly observes, this is a bullish endorsement of the industry.
 
The survey found that 80 per cent of investors rank performance as one of their top five factors for selecting managers, regardless of size. Approximately one third plans to allocate to managers with more than USD1billion in AUM, with Nemes adding: “65 per cent want to put money with managers under USD1 billion. The first two quarters of 2011, which were good for fund raising, saw money going into smaller funds.”
 
Institutional tickets could well see multi-billion dollar hedge funds hitting new AUM heights in 2011, so in that sense consolidation is likely. The only issue here is that, potentially, funds could get too big, too unwieldy, to manouevre in and out of markets. “I think these funds are a lot more disciplined about capacity issues than they used to be. They’re well aware that size can sometimes be a problem as it’s difficult to be nimble but you can’t generalize as some large hedge funds produced fantastic returns last year,” said Nemes. Indeed, the likes of Bridgewater, Citadel and Brevan Howard all did well.
 
With institutions becomingly increasingly more active at investing in hedge funds, the lack of internal resources to find new managers to invest in, who aren’t already well-established names like those above, is an issue. “Ninety per cent of respondents said they increased or maintained the size of their teams because the biggest impediment to every single hedge fund investor in our survey is lack of internal resources,” confirmed Nemes. Moreover, 25 per cent of institutions plan on increasing the size of their teams in 2012.
 
The survey also found that attitudes to seeding managers are changing. Whereas in 2004’s AIS only 21 per cent of respondents said they favoured day one investing, that figure had climbed to 67 per cent in this year’s survey. FoF managers are picking up on this and repositioning themselves to leverage off the fact that investors want early access to the next best manager. The survey suggests that investors are willing to seed and commit more money to doing so.
 
It does, however, come at a price. Around 70 per cent of respondents said they wanted discounted fees for day one investing, whereas in 2002 that figure was only 20 per cent. This illustrates that investors are becoming a lot more confident investing in this space and making it clear to managers, be they single or FoF managers, that they want improved fee terms. The survey also found that 51 per cent of respondents had negotiated fees in the last 12 months.
 
Consultants, alongside FoFs, are also likely to play an ever-increasing role in the industry. Around a quarter of the AIS respondents by AuM were hedge fund consultants, which in itself is significant and as Nemes pointed out: “Their business model and the FoFs business model are very similar. The survey found that 52 per cent of consultants said their hedge fund teams are bigger today than they were a year ago.”
 
With respect to strategy allocations in 2012, global macro came out on top with 42 per cent of respondents planning to increase allocations. This was followed by emerging markets, credit long/short, ABS, CTAs and commodity-focused strategies with long/short equity surprisingly further down the list this year.
 
“I think the key finding of this year’s survey is that institutional investors’ commitment to hedge funds is not wavering,” stated Nemes. “I think hedge funds have done a lot with regards to improving transparency, communication and operational robustness: all the things investors have been asking for for many years.
 

“As a result hedge funds, in our opinion, are going to be an ever bigger part of the larger asset management industry. Going forward, hedge funds won’t be thought of as a separate asset class but rather a part of the industry that manages risk actively.” 

 

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