Published on May 23, 2014
Managed Funds Association May 2014 HEDGE FUNDS: TRENDS AND INSIGHT FROM THE INDUSTRY AND INVESTORS
Managed Funds Association Executive Summary • The hedge fund industry has grown tremendously in the last decade from $625 billion in assets under management in 2002 to an industry- record high of $2.7 trillion in the first quarter of 2014. • This growth has been fueled by investors seeking ways to diversify their portfolios, manage risk, and deliver reliable returns over time. • Institutional investors, in particular, have had a profound impact on the industry and institutional capital accounts for 66% of global hedge fund assets.* • This presentation gives an overview of the hedge fund industry, providing insight on investment trends and topics. • Data included in this presentation comes from Deutsche Bank’s Twelfth Annual Alternative Investment Survey, the 2014 Credit Suisse Global Survey of Hedge Fund Investor Appetite and Activity, Hedge Fund Research Global Hedge Fund Industry Report, and the 2014 Preqin Global Hedge Fund Report, as referenced in the document. 2 Contents Industry Growth 3 Growing Popularity 4 2013 – A Year of Growth 5 Who Invests? 6 Why Invest 9 Institutional Trends 10 2014 and Beyond 15 Investment Strategies 18 *Source: 2014 Preqin Global Hedge Fund Report
Industry Growth Growth of the Hedge Fund Industry: • Hedge fund assets have more than tripled since 2002, driven primarily by increased allocations from institutional investors such as: – Public and corporate pensions – University and College Endowments – Philanthropic Foundations and Charities • Cash that has been previously redeemed and will be recycled back into the industry is another important source of assets.* • Institutional investors currently represent 66% of assets invested in the global hedge fund industry. • The industry is expected to reach an all time high of $3 trillion by the end of 2014, based on investor’s performance and net inflow predictions.* 3 *Source: 2014 Deutsche Bank Alternative Investment Survey
Investors Favor Hedge Funds: • Investors are increasingly favoring hedge fund allocations over other investment types. 4 Source: 2014 Deutsche Bank Alternative Investment Survey Hedge Funds Growing in Popularity
• According to a recent survey, nearly half of investors grew their hedge fund assets under management (AUM) in 2013.* • 47% of responding investors increased their allocations to hedge funds in 2013, including 52% of pension funds. • Among the institutions with the largest increases in hedge fund allocation were: – Pension Funds (private and public) – Endowments and foundations – Family offices 5 *Source: 2014 Deutsche Bank Alternative Investment Survey 2013 – A Year of Growth
Investor Statistics: • Research firm Preqin released a study recently mapping out the hedge fund investor universe, key findings include: • Endowments make up 12% of hedge fund investors. • Public pension funds represent more than 9% of all investors, with a mean allocation of 7.5% to hedge funds. • Corporate pension funds also represent 15% of hedge fund investors, with a mean allocation of nearly 10%. • Foundations represent one of many groups increasing their hedge fund investments, with mean allocations increasing from 15.6% in 2011 to 17.5% in 2013. 6 Source: 2014 Preqin Global Hedge Fund Report Breakdown of Hedge Fund Investor Universe By Investor Type Who Invests in Hedge Funds?
Endowments and Foundations: College and university endowments and philanthropic foundations play a vital role in expanding educational opportunity and enriching the quality of life in our communities. In 2014, 46% of endowments and foundations expect to increase their allocation to hedge funds to help meet their financial needs. These investments help provide scholarships, fund critical research, and enable economic development, health and education-related grants in cities and towns across the U.S. 7 Who Invests in Hedge Funds? Source: 2014 Deutsche Bank Alternative Investment Survey
Pension funds (Public and Private): Hedge funds also help provide retirement security for millions of hardworking American families through investments held by pension plans. In 2014, 60% of public and private pensions plan to strengthen their partnership with hedge funds by increasing their portfolio allocations. A number of plans also look to make initial investments with hedge funds to help diversify their portfolio and provide reliable returns over time. 8 Who Invests in Hedge Funds? Source: 2014 Deutsche Bank Alternative Investment Survey
Why Invest in Hedge Funds? • Investors partner with hedge funds to deliver:* – Risk-adjusted returns – Diversification – Low correlation with other investment types – Low volatility 9 *Source: 2014 Deutsche Bank Alternative Investment Survey
• According to the Deutsche Bank survey, two-thirds of institutional investors responding to the survey only invest directly with single-manager hedge funds. • This trend underscores the increased sophistication and due-diligence undertaken by institutions in their decision making process. • Two-thirds of investors routinely take between three to six months to complete due diligence on an investment manager – only a third did so in 2002. 10 Industry Trends – Direct Investment Source: 2014 Deutsche Bank Alternative Investment Survey
Institutional Trends – Dedicated Hedge Fund Teams Institutional Trends: Dedicated Hedge Fund Teams Institutional investors are strengthening their ability to perform due diligence and research potential managers for hedge fund allocations. In recent years, institutions have grown the size of their dedicated hedge fund allocation teams. • Eighty-seven percent of respondents grew or maintained the size of their hedge fund due diligence teams in 2013. • Pension plan respondents noted significant growth in this area, with 66% of those surveyed growing their teams in 2013. 11 Source: 2014 Deutsche Bank Alternative Investment Survey
Institutional Trends – Meeting Expectations Investors partner with hedge funds to help diversify portfolios, manage risk, and produce reliable returns. • During the investment cycle of 2013, 7 out of 13 hedge fund investment strategies either met or exceeded investors expectations from a year earlier. 12 Source: 2014 Deutsche Bank Alternative Investment Survey
Investors expect hedge funds to continue to perform well in 2014, with Credit Suisse’s survey showing that investors believe in hedge funds’ ability to produce absolute returns. 13 Source: 2014 Credit Suisse Global Survey of Hedge Fund Investor Appetite and Activity Institutional Trends – Meeting Expectations
• Hedge fund managers often invest their own money alongside that of other investors, forming a partnership with a shared interest in success. • Communication is a critical component of a successful investor/manager relationship. • Nearly 70% of investors say they did not reject a hedge fund based on a lack of transparency in 2013, an increase of 21% from 2012. 14 Source: 2014 Preqin Global Hedge Fund Report Institutional Trends – Transparency
2014 and Beyond Confidence in Growth Investors believe capital inflows in 2014, along with performance gains, will push the industry to an all-time record of $3 trillion in assets under management. 15 Source: 2014 Deutsche Bank Alternative Investment Survey
2014 and Beyond Confidence in Growth Ninety-two percent of hedge fund investors plan to increase or maintain their current allocations to hedge funds in 2014. 16 Source: 2014 Preqin Global Hedge Fund Report
Steady Growth in 2014: • Fifty-seven percent of institutional investors plan to increase their allocations to hedge funds in 2014. • Deutsche Bank expects $11 billion of new direct institutional flows into the hedge fund industry in 2014: $8.1 billion from pension funds, $2.1 billion from insurance companies, and $800 million from endowments/foundations. 17 Source: 2014 Deutsche Bank Alternative Investment Survey 2014 and Beyond
Investor Insight: • Investors identified the following hedge fund strategies as the most promising for 2014: – Equity Long/Short – Event Driven – Equity Market Neutral – Global Macro – Emerging Markets 18 Source: 2014 Deutsche Bank Alternative Investment Survey 2014 Investment Strategies
For more information contact: Steve Hinkson email@example.com 202-730-2600 www.managedfunds.org Follow us on Twitter: @MFAUpdates 19 Managed Funds Association
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