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Asian hedge funds, distressed debt will drive investor demand in 2019 – Deutsche survey

Asian hedge funds and distressed debt strategies will drive investor demand in 2019, according to an annual survey of 425 allocators conducted by Deutsche Bank's hedge fund capital group.

In its 17th year, the survey of allocators managing or advising on $1.74 trillion in hedge fund assets, found investors plan to increase their exposure to hedge funds despite underperformance.

An average hedge fund portfolio managed by the survey's respondents in 2018 returned 1.6% year-to-date Nov. 30, lower than their full-year average performance target of 7.17%. The shortfall was the largest in seven years.

But 46% of respondents still plan to increase their allocation to hedge funds in 2019 even though only 13% of the surveyed investors met their performance target in 2018, compared with 68% a year earlier.

For the first time since 2010, Asian hedge funds have seen the most interest from investors, the survey found. Some 36% of investors are planning to increase exposure to the region in 2019.

Distressed debt strategies received $6.5 billion of net inflows on rising interest rates and renewed market volatility in the fourth quarter of 2018 — the largest increase in net new capital of all strategies quarter-over-quarter.

Allocators that plan to reduce their allocation to hedge funds in 2019 said they will boost their private equity allocation from the hedge fund redemptions, said more than half of respondents in the survey.

"The repositioning of investors to the East shows a decisive turn in investor preference," said Marlin Naidoo, global head of capital introduction and consulting at Deutsche Bank, in a news release.

"The level of experience and institutionalization of portfolio managers in the region has grown and improved over the years," Mr. Naidoo said. "These groups are expected to benefit from less competition and crowding than developed markets, while the region's inefficiencies provide managers with opportunities to generate differentiated returns."