Euro and US fund managers are level, says JP Morgan

89% of respondents believe the greatest risk today is deflation

High net worth investors have as much confidence in the ability of European hedge fund managers to generate returns in 2003 as they do in US hedge fund managers, according to a survey by JP Morgan Private Bank.

Some 45% of 150 high net worth respondents said they expected better returns from US hedge fund managers, but this was almost matched by the 42% who expected European managers to be the best pick among hedge fund managers.

The bank polled the wealthy investors, many with at least $10m in investable assets, for their views on top-performing asset classes, asset allocation and currency trends.

With the divergence in geographic preference from investors came modest expectations about returns from this alternative investment.

About 42% of those who replied to the study expected their hedge fund portfolios to return between 5% and 10% annually over the coming three to five years. Nearly 45% of respondents said they believed the long/short equity strategy to be the best hedge fund strategy over the next two years.

Hedge fund investing remains popular overall, however, with 74% of respondents interested in them and nearly a quarter saying that 25% or more of their portfolios consisted of hedge funds already. Despite warnings from some hedge fund analysts that up to 800 could close during 2003, almost all the respondents to JP Morgan Private Bank's survey said they expected to increase or maintain their allocation to hedge funds over the next 18 months.

According to 36% of respondents, investors' primary concern about hedge funds is poor performance, while 35% feared fund blow-ups.

For those hedge fund operators wondering which currency classes to offer investors in their funds, respondents to the JP Morgan study were split on the fate of the euro with 37% believing it would rise against the dollar in the coming year and 38% thinking it would remain steady.

While 89% of the respondents said they believed the greatest risk they faced today was deflation, 39% expected inflation in their chosen currency for investment would be between 1% and 2%.

Hedge funds will have to battle against the other alternative classes in 2003, as 55% of respondents felt optimistic with the outlook for European private equity, even though 59% of respondents had already made outlays in this area in the past two years.

Investors are also bullish on real estate as 41% said they expected local mortgage rates to stay the same, while 33% predicted they will rise slightly.

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