The annual Hedge Fund Investor Survey from Credit Suisse shows that the average investor expects the hedge fund industry to exhibit strong growth this year, expanding 18% from a current estimate of $1.96 trillion to $2.31 trillion, or $350 billion of growth across performance and inflows.

The survey analyses responses from institutional investors representing $1.2 trillion of hedge fund investments on a broad range of issues, such as which hedge fund strategies are most sought after, predictions for industry growth, changes in due diligence standards and appetite for UCITS hedge funds and new fund launches.

The survey, which was compiled by Credit Suisse’s Prime Services business, aggregates the views of a diversified audience of approximately 600 investor groups, including pension funds, consultants, family offices and funds of hedge funds (FOHFs).

Edgar Senior, Managing Director and Global Co-head of Capital Services at Credit Suisse in London said: “As well as addressing the core question of which hedge fund strategies are most sought after by investors in 2011, this highly representative survey also examines a number of previously untested assumptions about how the industry functions and how investors behave, such as whether stereotypes of differences between investor types and regions are supported by the data.”

This global survey provides a unique "look-through” analysis of the geographic sources of intermediaries’ assets. In a key finding the survey suggests that Asian-sourced assets may increase significantly when including indirect holdings through American and European intermediaries, increasing from 5% to 18% of underlying assets, while Europe represents 35% and North America represents 47% of the total.

Another key indicator of sentiment is the strong appetite for newly launched funds, with 61% of investors theoretically able to allocate to a new hedge fund whose managers have at least a three year track record. Despite this confidence, investors are maintaining high standards of due diligence, with even more than last year insisting on aspects such as independent administrators, and they have not become complacent about returns, with a majority of investors noting the importance of risks such as crowding, sovereign risk and excessive beta.

Investors gave detailed responses about their investment plans, with the most popular strategy unchanged from a year ago: Event Driven funds. However, there are significant changes in other preferences, with a recovery in appetite for Equity Long/Short funds, variants of which now rank second and third. Macro funds moved from second to fourth place, but are still widely sought after, particularly those with a differentiated approach. Commodity strategies also moved up the ranking, from ninth to fifth most popular.

Senior commented, “One of the most important conclusions we have drawn is a lasting recovery in investor confidence and risk appetite, yet without any reduction in the newly heightened due diligence standards that we saw emerging last year. The consistency in views and appetite between last year and this year is noteable, demonstrating an emerging and stable equilibrium between the different participants in the hedge fund industry.”

Other findings include:

• A modest decrease in how many investors are negotiating fees today, although investors are still more focused on modifying the structure of fees than the absolute levels, and more focused on the absolute level of the management fee than of the performance fee.
  
• The percentage of investors who regularly express an opinion on the prime brokers to inside hedge funds increased from 42% last year to 57% this year, with the majority of investors viewing both diversification and credit ratings as important selection criteria.
  
• Investors continue to require that redemption terms be justified by the liquidity of the strategy, with 73% accepting 90 day notice to redeem from a lower liquidity strategy such as distressed credit, while only 28% would accept similar notice for a higher liquidity strategy such as managed futures.
  
• Approximately the same number of investors are still interested in both UCITS funds and managed accounts as observed last year, with neither the cheerleaders nor the pessimists being proved right in their forecasts.
  
• There is not as much difference as expected between the “stickiness” of FOHFs versus end investors, as measured by annual turnover, which is 13% for FOHFs and 10% for pensions.
  

The 2011 survey also adds a number of new topics raised by managers and investors, including:

• An analysis of the most common reasons that investors give for not investing into a manager whose strategy is of interest: a lack of clarity on the investment strategy was a more common reason than a lack of track record, suggesting that marketing should focus less on track records.
  
• Ranking of which “risk factors” are seen as most serious by investors, where “crowding”, sovereign risk and “excessive beta” gave most investors the most concern.
  
• How FOHFs are using a range of tools to rebuild their capital bases, such as niche products and advisory services; and the converse question of how many end-investors use FOHFs or advisors to complement their own investing, revealing that 39% of end-investors will also consider niche FOHFs.
  
• Also on the topic of the recovery of the FOHF industry, the survey polls intermediaries on their M&A plans, with 36% responding that they are already looking or interested in acquiring smaller firms.
  
• A look at investors’ sensitivity to which fees and expenses may legitimately be allocated to the fund instead of to the manager, with significant distinctions being drawn between categories of expenses.