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Investors Expecting More from Hedge Funds

Return expectations have risen by more than a quarter among institutional investors over the past year, according to research from Credit Suisse.

(March 7, 2013) - Institutional investors want it all from hedge funds in 2013.

Respondents to a Credit Suisse survey expect the asset class to return 6.9% the year, with low correlation to the rest of their portfolios--all at reduced fee deals.

"Institutional investors are clearly expressing more confidence in risk assets in this year's survey and appear less worried about left tail risk events or macroeconomic uncertainty," said Robert Leonard, managing director and global head of capital services at Credit Suisse, in a statement. "Given the backdrop of effective central bank policies, lower political uncertainty and positive performance last year, it is not surprising to see increased expectations for 2013."

In 2012, the same survey found respondents forecasted hedge fund returns of 5.4% on average-marking a jump in expectations of more than a quarter from 2012 to 2013.

More than 550 groups of institutional investors representing $1.03 trillion in hedge fund investments weighed in on this year's survey, including pension funds, consultants, family offices and funds of hedge funds.

Taken together, these respondents showed the most appetite for managers pursuing long/short equity strategies, with emerging market equity and event-drive strategies the second and third most popular approaches, respectively.

It's not clear whether investors have sensed the global political situation stabilizing or have simply acclimatized to uncertainty. Either way, respondents were bullish on developed Europe and far less worried about sovereign default risk and credit/counterparty risk than last year. The top sources of risk for hedge fund investments in 2013, according to those surveyed, are crowded trades/herd behavior, regulatory changes, and underperformance risk. 

Credit Suisse' Hedge Fund Capital Services Group--a division dedicated to "helping hedge fund clients raise capital from institutional investors," according to the website-publishes the survey report. This year's edition is titled "Reaching New Heights"--although that sunny prediction for hedge funds is not industry consensus. 

Recently, hedge fund management and (to a lesser extent) performance fees have incited some institutional investors to speak out, push back, and even pull out of the asset class.

On March 4, for example, A$7 billion Australian superannuation fund CareSuper announced it had let go of its last hedge fund manager.

"Hedge funds have not met our expectations and they are expensive," Greg Nolan, chief investment officer, told The Australian Financial Review. "Those two factors combined have led our board to decide to terminate the hedge fund managers we have."

In response, hedge funds have become more flexible on the fee front, according to Mercer research.  

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