Institutional investors are increasing their dominance of hedge fund assets, further displacing the high-net-worth individuals that were once the main clients for the industry.
Seventy percent of pension funds in a survey of hedge fund investors by Deutsche Bank plan to increase their allocation to hedge funds this year, while 57% of private banks plan to reduce their exposure.
Institutional investors bring scale to the industry. Almost half of the pension funds surveyed say they expect to increase hedge fund allocations by $100 million (€76 million) or more in 2013.
Institutions also bring an expectation of stable returns. Four-fifths of institutions are targeting returns of between 5-10% from hedge funds.
Overall, investors were optimistic about hedge funds. The average prediction for hedge fund performance this year was 11%, and investors guessed there would be $123 billion in inflows.
The survey supports evidence that the growth of institutional investors has reduced average hedge fund fees. Almost 80% of investors pay average management fees of between 1.5% and 2%. In the past, a 2% management fee was standard and some funds charged more. Three-quarters of investors say they pay performance fees of between 17.5% and 20%.
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