This year will see the highest net inflows to hedge funds since the start of the global financial crisis, according to institutional fund distribution agency Agecroft Partners.
In 2007, the year before the credit crunch reached its zenith, the hedge fund industry grew from $1.4trn to $1.9trn, partly on performance of 10% but also on the back of $195bn net inflows, according to data providers Hedge Fund Research.
Agecroft Partners founder Don Steinbrugge (pictured) said he expects 2012 to bring the largest net allocations since that year.
Admittedly this would not be too difficult, as funds suffered net outflows of $154bn and $131bn in the following two years, before taking in $55bn in 2010, and $70.7bn by October last year.
Agecroft Partners made its prediction the industry would beat the latter figure this year, despite the fact it posted its second worst annual returns on record last year.
According to data monitors Eurekahedge hedge funds lost 4.1% on their investments. Only one year, 2008 with a 19% loss, was worse according to monitors Hedge Fund Research.
Steinbrugge cited some key trends behind his rosier predictions, for inflows, for this year.
First, he said the "vast majority" of withdrawals from underperforming hedge managers would be rotated to better managers, not withdrawn from the industry.
Having spoken with more than 300 hedge fund organizations and 2000 institutional investors last year to form its prognoses for 2012, Agecroft also expects pensions to "continue to strive for enhanced risk-adjusted returns to decrease their massive unfunded liability".
A resulting 10-year trend in alternative investment will see more pension funds increase their average percentage allocation to hedge funds.
In contrast to pensions, Steinbrugge said many of the largest endowments and foundations are typically "fully allocated to hedge funds".
Therefore, increases in their hedge investments should largely correlate with the sector's asset growth. Agecroft expects this to be 10% to 20% annually.
"Stronger growth will come from mid-sized organizations that are under-allocated to hedge funds and are evolving their portfolios to look more like their larger peers," Steinbrugge said.
In contrast to these growth areas, Steinbrugge expects the four-year net redemption trend from funds of hedge funds to continue in 2012.
"This will be driven primarily by significant withdraws from the largest pensions funds that are choosing more frequently to make direct investments in hedge funds to save on fees.
"These redemptions will be somewhat offset by smaller and mid-sized pension funds and insurance companies that are increasing their allocations to fund of funds, along with high net worth individuals that are advised by financial planners.
"There will always be a place for fund of funds within certain sectors of the hedge fund investor community and those fund of funds that can change with the evolving landscape will be the most successful going forward."
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