According to the latest alternative investing survey by Deutsche Bank’s Equity Prime Services Group, 35% of those surveyed ( 323 pension funds, university endowments, charitable foundations and wealthy families with more than $380 billion in hedge-fund assets) indicate a decrease in investments to distressed debt while last year 44% said they would increase their portfolio allocation to distressed debt. No net change in convertible arbitrage is expected this year.
Credit Derivative Arbitrage will register increased inflows as 28% of participants indicate they will increase their investment in this relatively new strategy, Deutsche found. Finally, although the performance of fundamental Market-Neutral Long/Short Equity hedge funds lagged last year, 30% plan to increase their allocation to this strategy in the year to come.
Geographically speaking, the hedge fund allocation to Asian domiciled managers is expected to increase from 9.4% to 12.5% while allocations to US domiciled funds are expected to drop by 8%, the Deutsche data indicated.
- More than half of the investors surveyed actively manage their hedge fund holdings and 53% revaluate their portfolio on a monthly basis
- 25% of investors now say their typical hedge fund allocation is $20 million or more
- Only 21% of respondents normally allocate to a hedge fund at inception and 38% insist that capacity guarantees are one of the main reasons they allocate capital to start-ups
- 51% of respondents report holding periods of three or more years versus 60% in 2003
- Although 32% of investors are willing to lock-up capital for more than one year, 71% are willing to pay an exit fee for early redemption. Some are willing to pay up to a 3% early-redemption penalty.
- 38% of survey participants have allocated funds to a hedge fund within the first month of due diligence, while 20% take at least six months or more to complete the due-diligence process.
- 15% of investors now require their hedge fund investments to be in funds that are registered investment advisors.
When it comes to hedge fund due diligence, Deutsche said investors typically interview a large number of managers before making a single allocation. For example, funds of funds typically conduct more than 450 meetings with managers to make just 15 allocations. Surprisingly, less than 1% of the respondents doing due diligence look at fees when assessing a hedge fund manager.
Similar to last year, almost all participants require some level of transparency from their hedge fund managers and indicate risk and strategy drift monitoring as paramount concerns.
More than half the survey respondents have allocated capital to hedge funds for over five years while 44% live outside of the US (versus 38% last year).