Investors predict hedge fund industry assets of USD2.42trn at end 2013

This would represent an industry growth rate of over 10 per cent or USD220bn, comprising of positive performance and new capital inflows. If correct, this would represent an all-time high for hedge fund industry assets under management by the end of this year.

Credit Suisse’s annual Global Hedge Fund Investor Survey analyses responses from close to 550 institutional investors, representing USD1.03trn of hedge fund investments, on a number of topics.

These include investors' current views on the growth and return prospects for the hedge fund industry; their preference and allocations plans across various strategies and regions and their views on key new trends and developments in the industry. This year's survey also explored in closer detail preferences and investing trends amongst pensions and other institutional investors.

The title of this year's survey, "Reaching New Heights", reflects optimism expressed by institutional investors towards the prospects for industry performance and growth during 2013.

Robert Leonard, managing director and global head of capital services at Credit Suisse, says: "Institutional investors are clearly expressing more confidence in risk assets in this year's survey and appear less worried about left tail risk events or macroeconomic uncertainty. Given the backdrop of effective central bank policies, lower political uncertainty and positive performance last year, it is not surprising to see increased expectations for 2013."

Respondents shared their insights into which hedge fund strategies they anticipate allocating capital to during 2013:

• Long/short equity was identified as being the most sought after strategy in 2013
• Emerging markets equity was the second most favoured strategy
• Event-driven strategies moved up to third place from 10th place last year

In terms of regional preferences, emerging markets and Asia-Pacific regions remained in the top two spots, though they traded places from last year's survey. This seems in keeping with investors' stated increase in risk appetite. Investors also exhibited a very strong bounce back (26 per cent) in demand for developed Europe as they appear to have taken comfort in some of the political actions taken there in the latter half of 2012.

When asked about their preference for hedge funds from a size standpoint, investors indicated that those managers running between USD500m and USD2bn in assets under management were in the best position to be considered for future allocations.

The survey also uncovered a number of other key new industry trends and developments for 2013:

• Return expectations among institutional investors for hedge funds increased to 6.9 per cent from returns expectations from a forecast of 5.4 per cent last year.  This appears to coincide with the ongoing reduction in correlations and the belief that this will create an environment for stock-picking strategies to outperform.

• Respondents ranked crowded trades/herd behaviour, additional regulatory changes and underperformance risk as the three greatest sources of risks facing the hedge fund industry this year. Sovereign default risk and credit/counterparty risk, which were both in the top three last year, dropped significantly.

• Investors continue to show strong appetite for those new hedge funds launches deemed to be of institutional quality.  However, in a new development, the survey results showed a large uptick in the number of investors who would require some level of reduced fees, including founder's share classes.

• A new section in this year's survey covered trends and developments in the pension space.  The results indicated that public pension funds were the most active in this segment and expect to increase their allocations going forward. Further, our findings identified risk-adjusted and uncorrelated returns as the primary investment objectives of the pension community, and also highlighted the continued significance of consultants.

• Investors regard further hedge fund consolidations/liquidations this year to be a potentially significant development.  They also expect to see additional fee compression this year, as well as the growth of alternate structures such as 40 Act Funds and long-only vehicles from hedge fund managers.

Leonard says: "We believe that pension funds represent a key element for the future growth of the hedge fund industry and therefore, wanted to take a deeper dive into the developing trends surrounding their investment preferences and requirements.  We believe that this year's survey provides some truly unique insights into those trends."