Improving markets and a need to recoup 2008 losses will prompt investors to pour $50 billion into hedge funds this year and slow redemptions, Barclays Capital said in a report on Tuesday.
More than 300 investors surveyed by Barclays' prime brokerage unit reported stashing, on average, 14 percent of their portfolios in cash. Nearly 80 percent of these investors said they plan to start putting some of that cash back into hedge funds.
In spite of dramatic changes in the investor landscape, certain investors were ready to deploy their cash balances aggressively once markets stabilized, Brian Reilly, a Barclays Capital managing director, said in a statement.
North American endowments and foundations, the most aggressive investors in hedge funds at 14 percent of their portfolios, intend to reduce their exposure this year, Barclays found.
Pension funds, long restricted from betting on hedge funds, plan to boost their $437 billion allocation.
The hedge fund industry suffered record redemptions last year, fueled by weak performance exacerbated by a meltdown in financial markets last fall.
The slump led to a 20 percent decline in investable assets last year to roughly $60 trillion. Nervous investors also trimmed their hedge fund exposure to 2.4 percent of their portfolios last year from 2.6 percent at the end of 2007.
But conditions have improved in recent months, and Barclays expects redemption requests to slow, falling to 10 percent of total assets under management. In the 2008 fourth quarter investors withdrew 25 percent of the hedge fund industry's assets.
Global hedge fund managers predict their assets will bottom out at $1.2 trillion in the middle of this year and then level off at $1.3 trillion at year-end, said Barclays, which surveyed 100 hedge funds managing $700 billion of assets.
Investors also indicated they will shy away from risky, illiquid strategies and focus more on simpler, liquid markets. There also is demand for credit and distressed debt funds.
(Reporting by Joseph Giannone; editing by John Wallace)