Potential for narrowing discounts of listed hedge funds is “significantly more encouraging” than the below 10% returns most investors expect from the broader industry this year.

Three-quarters of listed hedge fund investors polled recently by Royal Bank of Scotland (RBS) expect hedge funds to make 10% or less in 2010, below the 10.5% estimated by Hedge Fund Research and the average annual 12.8% since 1990.

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No investor RBS questioned expected the industry to lose money in 2011 while 27% expected it to top 10% on average.

The largest proportion of investors (36%) were most positive over the coming six months about equity hedge strategies, including short bias and market neutral, followed by event driven and macro (each 23%), multi-strategy (14%) and relative value (5%).

Listed allocators’ preference in 2010 for equity strategies, event driven and relative value was rewarded during by above-average performance from each last year.

Only global macro, on which 10% of respondents were most positive, disappointed last year with average 8.6% returns.

The RBS investment funds team said the outlook for returns this year was “not a very persuasive argument for investing in hedge funds over the near to medium term [but] in our view the outlook for discount contraction within the listed hedge fund sector is significantly more encouraging”.

RBS said managers offering their investors cash exits would “give investors the potential to benefit from a supplementary return on top of portfolio asset growth, from rising share prices relative to net asset values (NAVs)”.

Seven funds of hedge funds (FoHFs) face continuation votes by August, RBS said. Two more are expected to do so later in 2011 after their share prices lagged NAV on average by over 5% for more than 12 months.

The seven ballots are for Acencia Debt Strategies, Alternative Investment Strategies, Castle Asia Alternative, Dexion Absolute and Dexion Equity, Goldman Sachs Dynamic Opportunities and Signet Global Fixed Income.

It is the third vote in as many years for some and will “prove to be a real test of shareholder loyalty,” in RBS’s view.

The bank’s investment funds team said boards and managers at some groups face “considerable pressure to reduce assets” in view of the wide discounts to NAV across the funds, averaging 13.4% on February 3.

RBS said investors in FoHFs are increasingly favouring in-house multi-manager products, whose average discount to NAV is just 2.4%. This peer group has swollen by £506 million ($812.5 million) in 2010 as CQS Diversified fund floated and BlueCrest’s AllBlue raised more capital.