Survey: Red Hot Hedge Fund Space to Cool in 2005

July 14, 2005 ( - Hedge funds are expected to bring in $40 billion this year - about a third of their 2004 totals - as investor tastes for traditionally popular offerings cools dramatically.

This was the key conclusion of a Deutsche Bank survey of o ver 650 investment firms worldwide, which predicted the significant slowdown in the once red hot hedge fund space, according to a Deutsche Bank  Web site statement . The latest prediction for hedge fund assets compares to the $123 billion that pension funds, endowments, charities and wealthy investors poured into the loosely regulated vehicles in 2004 – an asset record.

“We are seeing a slowing down of enthusiasm for flows into this space,” John Dyment, Global Head of the bank’s Hedge Fund Capital Group told reporters, according to a Reuters report.

The survey found that the asset growth slowdown was not evident across the board among different levels of investors. For example, small investors, who have assets of $500 million or less, plan to bump up their hedge fund allocations by 6.3%. At the other end of the size spectrum, the biggest investors, with more than $5 billion in assets, planned the smallest increase to hedge funds with a forecast 2.17% increase, the survey shows.

Particularly hard hit with outflows as losses mounted were hedge funds pursuing convertible arbitrage strategies where managers often bet a company’s bond price will rise while its stock price will fall, according to the survey.

According to the survey, investors now expect returns to be modest with 68% of those polled expected a total industry performance of between 6% and 8%.

Other survey results included that:

  • Pensions, endowments and foundations are making investment decisions more quickly, with half making allocation decisions in six months or less. Once in, they consistently hold their investments longer than any other investment class.
  • Investors are diversifying their allocations to more managers, with the average fund of fund or family office holding investments with 20-100 different hedge fund managers
  • Investors rank the best performing investment strategy for 2005 – 35% rank long/short equity as the top performing strategy and 22% rank Macro strategies as a top performer.
  • Multi-strategy hedge funds are emerging as one of the top investment choices for 2005, with investors selecting it because of their ability to move allocations of assets between strategy classes in a dynamic market.
  • Investors predict Asia, excluding China and Japan, will be the top performing region of 2005.
  • Investors are becoming increasingly resistant to lock-up periods. In 2004, 68% of investors would only invest in managers with lock-ups of one year or less; in 2005, this number rose to 77%.