The hedge fund industry will this year modestly outpace its long-term annual asset growth rate of 12.3%, even though 2011 was the industry's second worst year on record, according to the annual industry survey from Deutsche Bank.
“In order to stay alive and flourish and offer something different, funds of funds…can say, ‘We have the talent and knowledge and experience to spot people early’,” Nemes says.
Overall smaller funds – whether approached through funds of funds or directly – may find some investors more willing to invest early. Nearly two thirds of investor respondents to the research said they want to allocate to funds with less than $1bn. And this year 28% of respondents told Deutsche Bank they had no minimum asset sizes before allocating to a fund, compared to only 19% last year.
“Getting off the ground is a bit more difficult for managers than it was (years ago), but not more difficult than last year,” Nemes said.
This notwithstanding, the large hedge funds look set to grow even larger including via inflows. The proportion of investors investing with managers running over $1bn has increased from 8% in 2005 to 44% of all investors today. Out of about 7,000 managers globally, 90% of the total assets is concentrated in just 350 funds.
Nemes noted many of the large funds performed very well in what was a difficult 2011 overall for the industry.
The industry should increasingly expect to ‘give something back’ for their allocations – in 2004 almost half of investors told Deutsche Bank they did not expect concessions for allocating to a fund, but now it is only 5% who expect no quid pro quo for their custom.
Nemes pointed to fee breaks, or revenue shares or portions of the GP as common examples.
Deutsche Bank said: “The events of 2008 proved to be a catalyst of transformational change, with better alignment of interests, appropriate liquidity terms, increased transparency and enhanced risk management all becoming integral to every investor’s allocation decisions.”
Nemes added hedge funds may not always be superior performers in absolute terms, but they should be superior managers of risk.
“It is still a talent game, and a lot more people do it well [in hedge funds] than in other parts of the industry.”
This may be part of the reason hedge funds doubled their proportion of total fund assets – hedge and mutual combined – from 8% a decade ago.