Hedge funds end 2010 with record quarterly asset increase

Date: Friday, January 21, 2011
Author: Wendy Chothia, HedgeWeek

The hedge fund industry concluded 2010 with the largest quarterly increase in assets in the history, according to data released today by Hedge Fund Research (HFR).

Total industry assets grew to USD1.917 trillion, reflecting a quarterly increase of nearly USD149 billion, topping the previous record increase of USD140 billion in 2Q07.

The year-end figure approaches the historical asset level peak of USD1.93 trillion set in 2Q08 and represents an asset increase of 44% since 1Q09.  Hedge funds as represented by the broad-based HFRI Fund Weighted Composite Index posted a gain of 10.5 per cent, but full-year gains were concentrated into year end, with the HFRI gaining over 5.5 per cent in 4Q10.

Investors continued to increase allocations to the hedge fund industry, committing USD13.1 billion net new capital to hedge funds in 4Q10. This figure follows USD19 Billion of new capital inflows from the prior quarter and brings full year 2010 net inflows to USD55.5billion, the highest annual total since 2007. In contrast to prior years, falling volatility contributed to a more narrow performance dispersion among hedge fund strategies, with Relative Value Arbitrage gaining +11.7 per cent for the year, while Macro strategies posted a gain of +8.6 per cent, bounding gains of +11.5 and +10.6 per cent for Event-Driven and Equity Hedge strategies respectively.

Investors exhibited a clear preference for Macro strategies in 4Q10, allocating USD6.6billion of new capital to Macro funds, while Equity Hedge experienced a small net redemption of USD620 Million. For the full year, USD21.5 Billion in new inflows went to Relative Value Strategies, with Macro and Event Driven adding USD17.3 Billion and USD14.0 Billion.  Equity Hedge, the largest strategy area by assets, experienced an increase of USD2.6 Billion for 2010. Investors allocated USD1.8 Billion to Funds of Hedge Funds (FOFs) in 4Q10, the first consecutive quarterly increase for FOFs.

Increasing investor risk tolerance also contributed to a moderation in the concentration of quarterly allocations to the industry’s largest firms. While more than 80 per cent of new inflows were allocated to firms with >USD5 Billion in AUM for the entire year, only 51.6 per cent of inflows went to the industry’s largest firms in 4Q10.

“The second half of 2010 was a historic time in the hedge fund industry, characterised by powerful and pervasive trends shaping the institutional landscape of the hedge fund industry”, says Kenneth Heinz (pictured), President of Hedge Fund Research (HFR). “As the industry is positioned to surpass its previous asset peak, global investors are focused on the dynamics of inflation protection, strategic specialisation, enhanced liquidity, improved structure and transparency for accessing hedge fund performance in coming years.”