Global hedge fund assets under management hit $2.01 trillion at the end of 2011 despite minor outflows in the final quarter. Investors put a total of $70 billion into these funds last year, up from $55 billion in 2010, according to Deutsche Bank.

Deutsche Bank’s monthly hedge fund trends outlook for February logged a positive global performance across all strategies, with the exception of US managed CTA and Asian macro, which teetered flat on the month. 

More specifically, equity strategies led the way across all regions - carrying emerging markets at the forefront - while gross exposures were up 6 per cent alongside a 9.3 per cent hike in net exposures, ending January at 2.3 and 0.58 respectively.

European equity markets start on a “positive note”

Overall, the FTSE 100 returned 1.96 per cent while the DAX was up 9.5 per cent for the month, making it the best performer of all major indices in Europe.

The markets rallied regardless of the continuing macro headwinds in the form of unresolved Greek PSI (private sector initiative), geopolitical tensions in the Middle East and the FX volatility; the bank explained that those managers who lagged behind were “caught off guard” after running low net exposure in anticipation of continued market volatility.

Meanwhile, macro managers were “slightly negative to slightly positive” for the month, with most of the managers in positive territory associated with the event driven space.

“Given this backdrop, investors in Europe seem to be more forthcoming with their hedge fund allocations and the current sentiment bodes well for the coming year,” the bank said. “The investors we have spoken with are now more receptive to meeting with equity hedge managers than they were just a few months back.”

Deutsche singled out European distressed as a popular strategy in light of investors capitalising on Europe’s economic turbulence. European investors remain the most aware of their manager's liquidity profile compared to their global counterparts, favouring more liquid strategies as a result. 

US: endowments and foundations

Numerous endowments and foundations told the bank they have noticed many long/short managers struggling to generate alpha on the short side.

“This group of investors seems to challenge the 2 per cent and 20 per cent fee model - not just with equity managers - but across all strategies,” Deutsche Bank noted. “Their view is that while the performance fee needs to be at a level that rewards true talent, the management fee should be set at a minimum that ensures that the manager maintains a stable business.”

Private markets are recapturing attention following liquidity challenges between 2007 and 2009. More specifically, the bank said, allocators within this space are turning to emerging and frontier markets.

Australian investors consider alternative strategies

Although most of Australia’s biggest investors are currently fully allocated, many are nonetheless contemplating increasing the proportion of their investments in alternative strategies.

This "ensures" that 2012 will see some allocations to hedge funds, also helped by annual flows generated by Australian superannuation funds. At the same time however, investors are “quietly” making performance-based redemptions.

“Investors have signaled interest in well-established funds with three-year track records and nimble mandates that enable them to be decisive in challenging markets, for example CTAs or macro,” the bank said.

Meanwhile in Asia, chemical companies have been in demand on the short side. Taiwan experienced two convertible bond issuances this month by Wistron Corp and Pegatron Corp, while clients in Hong Kong added to property, automobiles and commodity plays. 

Global merger and acquisitions

Despite a 45 per cent decrease in global M&A activity since January 2011 – the value of which fell to $148.2 billion from $268.5 billion - this has not been the case for the US, where 18 deals are anticipated to close within the next four to six weeks.

While global volumes are down, quite the opposite is occurring in the oil and gas space, which has been the most active sector early into 2012 with deals worth $25.5 billion, representing the highest level for January recorded so far.