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Pension funds step up hedge fund allocations as consultant use spreads

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Pension funds around the world have increased their allocations to hedge funds this year to 8% on average from 7% last year, with their growing use of investment consultants having a gradual effect on tactics, according to a survey.

Deutsche Bank, in its annual Alternative Investment Survey, also said 48% of investors it polled were likely to increase their allocations to alternatives in 2016, after 47% increased the weighting in 2015.

This compares with 7% that are likely to decrease the allocations and 46% that are expected to keep allocations at the same level as now.

The survey covers investment in a range of alternative assets including hedge funds, private equity, real assets, commodities and alternative beta but focuses largely on hedge funds, which make up about half of the investor allocations surveyed. 

The researchers polled 504 institutional investors, funds of funds, consultants and managers – all of which were hedge fund allocators or investors – a group they said represented $2.1trn (€1.9trn) in hedge fund assets.

On the subject of the rise in pension fund allocations to hedge funds, Deutsche Bank said 71% of pension fund respondents now used an investment consultant, compared with just 15% in 2010.  

“This trend is contributing to a change in pension funds’ portfolio allocation tactics, including a more scientific focus on alpha versus beta and greater demands around operational excellence,” it said.

Anita Nemes, global head of capital introduction at Deutsche Bank, said: “Investors are concentrating and redesigning their portfolios in search of less correlated, diversified return streams.”

Some 41% of the survey’s respondents are planning to increase their hedge fund allocations during this year, Deutsche Bank said.

This compares with 11% aiming to decrease the allocations, and 48% whose allocations are expected to stay the same.

According to the survey, hedge fund industry assets are expected to grow by around 5% in 2016, to more than $3trn.

The bank said that, even though it had been “a challenging year for global financial markets and for hedge funds,” investors remained committed to their hedge fund programmes.

Within hedge fund investment, it said there was more demand for tailored strategies.

It said more investors were now aiming to raise allocations to products such as alternative beta and risk premia strategies, liquid alternatives, hybrid private equity and hedge fund vehicles, as well as co-investments.

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