The institutional hunt for returns brings green shoots

Marc Sidwell
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HEDGE funds didn’t always have an easy time of it in 2012 – witness the world’s biggest listed hedge fund Man Group, which parted company with its finance chief Kevin Hayes last June and announced in December its chief executive would step down in February 2013 following a year in which its plunging share price sent it out of the FTSE 100 index.

Yet Man’s shares have been on the rise this year and when its chief executive-designate Emmanuel Roman officially takes over the reins later this week it is anticipated he will announce a bold reshuffle of senior management with the hope of turning things around for the group, which had suffered five straight quarters of outflows by the end of 2012.

The latest research from Deutsche Bank shows a few reasons why such reinvention should be possible, not just for Man but for the wider sector. Hedge funds need to adapt, but a changing economic environment doesn’t have to mean a hostile one. While 57 per cent of private banks decreased their assets under hedge fund management in 2012, more than two thirds of pension funds increased their hedge fund allocations.

Deutsche sees that institutional commitment to hedge funds continuing this year, with nearly half of pension funds set to ramp up their allocations to the asset class by $100m (£66m) or more in 2013 as part of their quest for stronger returns.

That said, in an age of financial repression, even hedge funds are no longer looked to for outsize returns. Back in 2010, over half of investors expected double-digit returns from their hedge fund investments. Today, when returns that just manage to nudge above inflation can feel like a blessing, only a third of hedge fund investors are still expecting those double-digit returns. That said, with 79 per cent of institutional investors still targeting five to 10 per cent returns, hedge funds are evidently still seen as a vital tool for those responsible not just for safeguarding assets but seeing a steady growth in their value.

That other pillar of the hedge fund business model – clients’ willingness to pay substantial fees for exceptional returns – also remains in place. Downward pressure on fees is not one of the top three client trends. As 62 per cent of investors believe hedge funds matched or beat expectations in 2012, it doesn’t look like their reign is over yet.