Investor Interest In Hedge Funds To Cool, Survey Suggests

by Carla Johnson, Investors Offshore.com

14 July 2005

Investors are expected to pour significantly less new money into hedge funds during 2005 than in the previous two years, according to a survey by Deutsche Bank's hedge fund arm.

Over the next twelve months, those who took part in the annual survey, which polled 1,000 people from 650 investment firms earlier this year, predict that investors will place around $40 billion in new assets into hedge funds. This represents around one third of the amount invested in these private investment pools during 2004, figures from Tremont Capital Management show.

More than 60% of the respondents believe that the huge popularity of hedge funds will have the effect of suppressing returns in the future after $123 billion in new assets was pumped into the industry last year. Among investors who have more than 10 years investing experience, this rose to 70%. Some 60% of hedge fund investors expect returns of between 6% and 8% this year.

Nonetheless, the Deutsche report indicated that investors still plan to increase their allocations to hedge funds in the coming months: those with assets of $500 million or less say that they will increase their exposure to hedge funds by around 6.3%, while investors with $5 billion or more in assets will increase hedge fund investments by 2.2%.

The survey results have also revealed that most hedge fund investors have shifted their focus towards Asia. For the third consecutive year, investors expected higher growth in Asia (excluding China and Japan) than either the United States or Europe. Almost three quarters of the investors polled responded that they were increasing allocations to funds invested in Asia, and no respondents were expecting to reduce exposure to the region. By comparison, 55% are intending to increase allocations to funds invested in Europe, and only 22% will increase allocations to funds holding American assets, while 23% are anticipating reducing assets in funds holding US securities.

Interestingly, the poll suggests that most hedge fund investors are happy at both the fee structures and the level of transparency of funds. Typically, hedge funds charge a 2% management fee and take 20% of any returns. The fact that this has risen from 1% and 20% at a time of record hedge fund inflows suggests investors are not deterred by fees. Meanwhile, more than two-thirds (67%) of those polled stated that they only required a limited amount of transparency from hedge funds, compared to 14% who desired full transparency.

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