A Deutsche Bank survey indicates that pension fund trustees are becoming increasingly sure of the merits of hedge fund investing, despite a disappointing year for the industry's returns.

The firm's annual international survey of hedge fund investors found that only 16% of respondents cited trustees and their boards' views on hedge funds as the biggest impediment to further increasing their hedge fund portfolios, down significantly from 30% in 2011.

The same survey indicated that 38% of investors trustee boards strongly believe in the validity of hedge funds as an investing tool.

That is an increase from 25% fully-fledged hedge fund fans in 2011, which Anita Nemes, Deutsche Bank's global head of capital introduction and report author, explained to Pension Funds Insider was most likely due to experience and the growing institutional offering that hedge funds provide.

The survey reinforced the much noticed institutionalisation of the hedge fund industry. This has been a clear trend since the financial crisis as hedge funds become increasingly appreciative of the advantages of attracting stable long-term investment from pension funds and other institutional investors.

Over one-third of this year's survey respondent were end institutional investors (excluding fund of funds, many of which are also institutional) compared to 11% in 2002.

Nemes told Pension Funds Insider that hedge funds are "an active way of managing risk rather than just another asset class. Anybody with a funding gap will want to invest in dampening volatility and protect from the downside".

For many observers performance worries remain a big caveat to the increasing flows of pension money into the industry. The number of investors in the Deutsche Bank survey who said that 30 percent or more of their managers have not reached the high watermark has doubled.
 
Nemes said "performance will never go out of fashion of course. A major reason why people invest in a hedge fund is that they are looking for better returns."
 
Nemes believes that consolidation in the hedge fund industry is likely in the next year. 
 
She doesn't share concerns about large hedge funds being naturally poorer performers than smaller ones, saying "size can be a problem as it's difficult to be nimble with huge numbers of assets but if you look at the industry on the whole you really can't generalise – some large hedge funds produced fantastic returns last year."

With 80% of institutional investors responding to the survey admitting to have increased their hedge fund investments over the past year, there looks likely to be rich pickings for those hedge funds able to thrive and expand in the current environment.

Strangers no more

A further indication of the increasingly pivotal role played by institutional investors like pension funds in the hedge fund industry is that pension fund trustees now largely see eye-to-eye with star hedge fund managers when it comes to the vital issue of transparency.

70% of respondents to the Deutsche Bank survey say they are satisfied with transparency. Nemes said: "That number used to be much lower and I think that is because hedge funds have become a lot more open, but a lot of pension funds are perhaps also realising what data it is they really need from a hedge fund they invest in."

Nemes said pension fund trustees might have begun to accept that there is no point always asking for full position level disclosure from a hedge fund and are instead focusing on understanding where their returns come from with profit and loss attributions and risk analytics.

Nemes added: "Pension funds are OK in paying two and twenty for alpha but they are not happy with paying two and twenty for beta so they want to be reassured on that."

dbillingham@wilmington.co.uk