Deutsche Bank Alternative 2006 Investment Survey

Well timed to assist those planning for 2007, Deutsche Bank has conducted a survey of more than 200 institutions representing more than two thirds of investors in the global hedge fund industry (USD900 billion of USD1.4 trillion) across 30 countries.

In summary, the survey pointed to expectations of average strategy returns of 10%, additional inflows of USD110 billion and importantly for the Australian hedge fund industry, increased focus on Asia.

The report included Australia (grouped with Asia) and many of the trends observed will be relevant to participants in the Australian hedge fund industry. Highlights include:

1. Most firms reduced the NUMBER of allocations to hedge funds in 2006 (median of 13 in 2005 compared with median of 10 in 2006), but increased the SIZE of initial allocations (by 50% over 1 year).

2. About 25% of investors have a due diligence period of 3 mths or less and a further 50% take 3 to 6 mths to make an investment decision.

3. 25% of investors (and mostly US FoF's) will consider seeding start-up hedge funds in return for equity stakes, discounted fees or economic participation in the fund.

4. Median return expectations for 2007 of 10% with best outlook among regions in Emerging Markets Asia and products equity long/short.

5. Funds with China exposure expected to be hotly pursued with flows expected to rise 38% and also Emerging Market Asia. Funds focused on the US expected to have modest outflows. Notably, multi-strategy has slipped from top of the list of most favoured products.

6. Investors expressed concern about hedge funds adding private equity components (in side pockets) to traditional hedge fund offerings.

7. A subtle but important distinction was made between flows into Long/Short Equity (6% outflow expected from a large product group in which 89% of respondents invested) and Market Neutral (14% inflow to a relatively small product group). This may reflect investor concern about the contribution of beta in long/short equity and the risk these funds face if sharemarkets decline in future. This was raised in an earlier post to this blog titled Ernst & Young Hedge Fund Symposium

8. survey respondents highlighted the challenge of identifying managers capable of meeting performance objectives. Funds that can deliver consistent alpha will be in high demand.