Hedge fund investors see demise of US dollar in five years

One in five hedge fund investors believe that the US dollar will cease to be the world's reserve currency within five years, finds a new global sentiment survey.

Meanwhile, almost three-quarters think China will be able to engineer a soft landing for its economy through continued monetary tightening. 

In its macro survey, Newedge Prime Brokerage targeted family offices, fund of hedge funds, pension funds, consultants and other institutions to determine their world views as they seek a home for their capital in 2011.

Overall, it received responses from more than 200 individuals at these firms, with 50% from Europe and 25% from Asia and North America. All responses were provided anonymously.

Asked if the dollar would continue to be the world's reserve currency in five years' time, 79.8% replied yes, but a significant 20.2% said no. However, Newedge acknowledged that, given the binary choice, some may simply have been expressing the view that the dollar is declining in importance. 

Very few investors (7.3%) think that EU authorities have the sovereign debt issue under control, while nearly 50% say the magnitude of this issue is such that markets have yet to fully price in problems yet to come.

Meanwhile, an overwhelming 82% of investors believe bond investors will lose confidence in the deficit reduction programmes of governments and will force rates up within the next two years.

As for when the US Federal Reserve will begin to exit its easy monetary policy, half of respondents think it will be 2012, although 35% still say it will be 2013 or even later.

On the question of inflation in emerging markets, fewer than 20% suspect pressures will not be contained, although 42% indicate authorities may have to resort to potentially disruptive policy measures such as capital and price controls to do so.

Unsurprisingly given events in Tunisia and Egypt at the time the survey was conducted, 58% of respondents see geopolitical risk as a likely headwind for markets in 2011; while a convincing 65% believe commodity prices will rise this year (this was the one issue where investors held similar views irrespective of their location).

"It appears there is still some uncertainty about the outlook for developed markets, based on responses to questions about the EU sovereign debt situation, timeline for the US Fed exiting and investors forcing rates higher," concludes Newedge. 

"We sense, however, a somewhat more sanguine feeling when it comes to emerging markets and their ability to get a handle on inflation and its effects, and particularly on China's ability to avoid a major dislocation.

"Either way, based on the split responses, it seems managers may be navigating markets that can simply be defined as 'risk on' and 'risk off' for a while longer."