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Hedge funds return 11.46% in 2010, investors add $86bn

Sunday, January 09, 2011
Opalesque Industry Update - Hedge funds returned an average of 11.46% with nearly a third the volatility of equity markets in 2010 while investors added an estimated $86 billion.

Below are early estimates* for December and full year 2010 hedge fund performance and asset flows. A full report will be available later in the month.

December Highlights:

* The equal weighted HFN Hedge Fund Aggregate Index was +3.84% in December and +11.46% in 2010. The S&P 500 Total Return Index (S&P) was +6.68% in December and +15.06% in 2010.

* Hedge fund assets increased an estimated +3.48% in December to $2.496 trillion. Net investor flows accounted for an increase of $9.1 billion while performance accounted for an asset increase of $74.8 billion.

* Surges in equity and commodity markets drove December hedge fund returns to one of the best months in the last 10 years. Fixed income and FX strategies lagged, but were still broadly positive.

* Smaller funds again outperformed larger funds during the month. Funds with >$500mm returned an average of +2.66% compared to funds with <$500mm which were +3.89% in December.

* Emerging markets funds trailed other regional classifications in December, with Russia focused funds the lone exception. Early reports from funds investing in China showed negative returns during the month.

2010 Highlights:

* On a risk adjusted basis, hedge funds significantly outperformed equity markets in 2010. The S&P's extra 360 basis points of return over the HFN Aggregate came with nearly 3 times the volatility.

* Investor confidence in hedge funds rose throughout 2010. Industry assets increased an estimated +15.0% in 2010 driven by performance and strong investor inflows. Net investor inflows accounted for AUM increasing 4.0%, or $86.8 billion through the year and the rate of allocations increased significantly in the second half.

* Investors willing to take directional exposure mostly outperformed equities in 2010. The common misconception of hedge funds in 2010 was that performance was disappointing, however many strategies broadly outperformed equity markets in 2010, including sector focused equity strategies (technology, natural resources/energy, small cap and value), mortgage related securities, emerging markets and distressed funds.

* Smaller funds only slightly outperformed large funds in 2010. Despite recent outperformance by smaller funds, there was significantly more homogeneity among small and large fund returns in 2010 compared to 2009.

*Early estimates are based on funds reporting December returns as of January 7th, 2010. Performance has a tendency to drift lower as more funds report. Asset estimates may drift lower, but have not shown a consistent tendency to do so.

HFN's full December report, to be released in the third week of January, will provide details on high water marks and asset flows by strategy and region.

December and Full Year 2010 Benchmark Performance:
Emerging Market Benchmarks:
HFN Brazil Index: +1.86% in December, +12.06% in 2010
HFN China Index: -1.39% in December, +4.87% in 2010
HFN India Index: +1.89% in December, +12.76% in 2010
HFN Russia Index: +8.93% in December, +23.53% in 2010
HFN Latin America Index: +1.47% in December, +11.37% in 2010
HFN MENA Index: +2.07% in December, +13.29% in 2010
Emerging Market Debt: +0.80% in December, +7.70% in 2010
Emerging Market Equity: +2.47% in December, +13.56% in 2010
HFN Emerging Markets Index: +3.34% in December, +15.78% in 2010

Broad and Developed Market Benchmarks:
HFN Asia Index: +3.43% in December, +9.33% in 2010
HFN Europe Index: +4.41% in December, +9.96% in 2010
HFN North America Index: +3.75% in December, +12.97% in 2010
HFN Australia Index: +3.04% in December, +11.01% in 2010
HFN Japan Index: +5.13% in December, +7.47 in 2010
HFN U.S. Index: +3.79% in December, +12.52% in 2010

Fixed Income (FI) Strategies
All Fixed Income Strategies: +1.24% in December, +11.68% in 2010
Corporate Bond Strategies: +1.54% in December, +12.70% in 2010
Government Bond Strategies: +0.25% in December, +7.15% in 2010
HFN Distressed Index: +3.32% in December, +15.63% in 2010
HFN Mortgages Index: +1.15% in December, +22.73% in 2010
HFN Fixed Income Arbitrage Index: +0.39% in December, +10.53% in 2010

Equity (EQ) Strategies
All Equity Focused Strategies: +3.90% in December, +11.38% in 2010
HFN Long/Short Equity Index: +4.50% in December, +11.03% in 2010
HFN Market Neutral EQ Index: +0.66% in December, +4.11% in 2010
HFN Short Bias Index: -7.26% in December, -17.49% in 2010
HFN Energy Sector Index: +3.71% in December, +18.79% in 2010
HFN Healthcare Sector Index: +4.18% in December, +8.38% in 2010
HFN Technology Sector Index: +8.81% in December, +29.83% in 2010
Financials Equity Strategies: +4.21% in December, +5.47% in 2010
Natural Resource Equity Strategies: +3.29% in December, +14.62% in 2010 Real Estate Equity Strategies: +4.14% in December, +6.05% in 2010

Commodity and Foreign Exchange (FX) Related Strategies
Foreign Exchange Strategies: +0.87% in December, +4.42% in 2010
Financial Futures Strategies: +3.04% in December, +1.09% in 2010
Commodity (Non-FX) Strategies: +5.84% in December, +12.18% in 2010
HFN CTA/Managed Futures Index: +5.40% in December, +9.98% in 2010...Corporate website: Source
KM

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