Hedge fund assets will increase by 11% in 2013 to an all-time high of $2.5 trillion, according to the 11th annual Alternative Investment Survey from Deutsche Bank.
Almost 60% of institutional investors surveyed increased hedge fund allocations in 2012, including two-thirds of pension fund respondents. Sixty-two percent of all respondents expect to increase hedge fund assets this year.
The 11% anticipated increase this year is attributed to $123 billion in net inflows and $169 billion in performance.
Almost half of pension fund respondents are expected to increase hedge fund allocations by $100 million or more this year. Emerging markets, event-driven and global macro hedge funds are the most popular type of strategies pension funds are seeking this year.
Pension funds are expected to lead the hedge fund growth as more and more institutional investors move toward a risk-based approach from a traditional asset allocation approach of equities, bonds and alternatives.
“More and more pension funds are looking at or (are) using hedge funds throughout the portfolio,” said Marlin Naidoo, head of hedge fund capital group, Americas, in a telephone interview. “There is more capital on the table that can be allocated to hedge funds.”
For funds of funds, investors are looking more for customized, tailored approaches that might focus on areas like emerging markets or emerging managers, Mr. Naidoo said, since investors are better at accessing developed markets exposure through direct investments.
This year's survey has also continued the trend of investors expecting steady, predictable returns from hedge funds. Two-thirds of investors felt hedge funds performed as expected or better last year, and 79% of institutional investors are targeting returns of 5% to 10% in 2013.
“When pension funds look at hedge funds, they tend to look at lower net, more market-neutral strategies,” Mr. Naidoo said. “They're looking for something they can't get elsewhere in their portfolio.”
The survey consisted of more than 300 investors worldwide managing more than $1.2 trillion in hedge fund assets. The institutional investors in the survey manage about $3.9 trillion in total assets, including $132 billion in hedge funds.