Hedge funds arent dying out but the
industry is being disrupted, according to Deutsche Bank.
In the latest edition of the banks annual
alternative investment survey, the firm found that
investors largely remain committed to the asset category,
despite several high-profile divestments and a year of
Nearly three-quarters of the 460 investors surveyed said
they expected their hedge fund portfolios to perform better
this year than last, and 83 percent planned to maintain or grow
their allocations to the area.
However, Deutsche Banks Marlin Naidoo, head of the
firms Americas hedge fund group, warned that investor
demands are evolving and managers must evolve too if
they are to stay in the game.
Theres been a lot of news and press around this
question of, Is the industry contracting?
Naidoo told Institutional Investor. In reality
the industry is the largest its ever been, and
whats its really going through is disruption, not
According to Naidoo, investor attitudes are shifting both in
terms of which strategies they prefer and the
terms they are willing to accept. One major theme
highlighted by the survey is the rise of quantitative
investing, with 79 percent of investors polled allocating to
systematic strategies, up from 70 percent last year.
Of the top ten most in-demand strategies for 2017, half were
systematic. In particular, the bank found a rapidly growing
appetite for quantitative macro funds, which jumped from 12th
place last year to the third-most popular this year.
In order to stay in the game, managers either need to
embrace quantitative strategies by changing, not necessarily
their investment philosophy, but their investment process
or they need to narrow their focus to more niche
opportunities where theres a little more edge and which
havent yet been disrupted by systematic strategies,
Also facing disruption is the relationship between managers
and investors. Deutsche Bank noted that limited partners (LPs)
are not only demanding better alignment of interests in terms
of fees, they also want access to key decision-makers like fund
This is a relationship investment almost as much as it
is a return investment, Naidoo said. Managers need
to be able to spend more time with their LPs.
According to the survey, average management
fees have dropped to 1.59 percent, down from 1.63 percent
last year. Meanwhile, performance fees have also fallen
slightly, from 17.85 percent to 17.69 percent on average.
Three-quarters of investors surveyed said they had
negotiated fees with fund managers. Many listed hurdle rates
and scaling back management fees as assets under management
grew as preferred terms.
Investors remain committed to the industry,
Naidoo said. But there needs to be much more dialogue
between investors and managers to find the right