Opalesque Industry Update - |
- Hedge funds end 2010 with record quarterly asset increase of $149bn
- Investors favour Macro and Arbitrage funds and industry nears pre-crisis asset level;
- Increasing risk tolerance and falling volatility influence investor allocations
The year-end figure approaches the historical asset level peak of $1.93 trillion set in 2Q08 and represents an asset increast of 44% since 1Q09. Hedge funds as represented by the broad-based HFRI Fund Weighted Composite Index posted a gain of 10.5 percent, but full-year gains were concentrated into year end, with the HFRI gaining over 5.5 percent in 4Q10.
Investors continued to increase allocations to the hedge fund industry, committing $13.1 billion net new capital to hedge funds in 4Q10. This figure follows $19 Billion of new capital inflows from the prior quarter and brings full year 2010 net inflows to $55.5billion, 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 percent for the year, while Macro strategies posted a gain of +8.6 percent, bounding gains of +11.5 and +10.6 percent for Event-Driven and Equity Hedge strategies respectively.
Investors exhibited a clear preference for Macro strategies in 4Q10, allocating $6.6billion of new capital to Macro funds, while Equity Hedge experienced a small net redemption of $620 Million. For the full year, $21.5 Billion in new inflows went to Relative Value Strategies, with Macro and Event Driven adding $17.3 Billion and $14.0 Billion. Equity Hedge, the largest strategy area by assets, experienced an increase of $2.6 Billion for 2010. Investors allocated $1.8 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 percent of new inflows were allocated to firms with >$5 Billion in AUM for the entire year, only 51.6 percent of inflows wnet 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”, said Kenneth Heinz, 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.”