Institutional investors predict hedge fund assets under management will increase by 12% to a record $2.8 trillion this year, according to Credit Suisse’s annual hedge fund investor survey.
That increase would result in an additional $300 billion in assets to the industry, from both performance gains and new capital inflows.
“Investors were also more optimistic about performance of the overall hedge fund industry, increasing their expectations for returns this year,” said Robert Leonard, managing director and global head of capital services, in a news release accompanying the survey. Hedge funds are predicted to return 7.1% on average in 2014, with 98% of respondents expecting positive returns.
Long/short equity strategies are expected to have the best returns for the second straight year, according to 41% of respondents, while 19% thought event-driven strategies would do the best. However, event-driven strategies had both the highest net demand and the greatest increase in demand from 2013.
Long/short equity-fundamental and long/short equity-general were next with a net demand of 43% and 39%, respectively, followed by global macro with 31%.
It was a different story for emerging markets hedge funds. Emerging markets equity net demand fell to 11th place, at 11%, from second place last year. Emerging markets fixed-income/credit net demand was down 14 percentage points to 3%. Fixed-income strategies in general saw a decrease in net demand this year.
Geographically, investors have the largest net demand for strategies focused in developed Europe and Japan at 43% and 33%, respectively, the survey said. There is a 15% net demand for North American strategies, up slightly from last year.
In terms of the greatest risks to the hedge fund industry this year, 94% cited crowded trades/herd behavior as a risk this year, including 48% who said it was a “significant risk.” Last year, the risk factor topped the list as well. Regulatory changes fell to fifth from second last year, with 36% citing it as a significant risk. The rest of the top five were: risk complacency due to low-volatility environment at second; hedge funds chasing equity markets; and monetary policy uncertainty.
About 505 institutional investors representing $1.16 trillion in hedge fund investments participated in the survey.
