Cautious investors cut FoHFs asset size but hedge funds top $2trn

Increasingly cautious institutional investors have cut the number of funds of hedge funds with between $2bn and $5bn assets, but at the same time played a key role in tipping the entire industry over $2trn total assets, research suggests.

Hedge funds now hold $2.02trn, a new record and over twice the $1.33trn the industry shrank to by the first quarter of 2009, according to data monitors Hedge Fund Research.

Net subscriptions of $32bn last quarter were the largest three-month inflow since the third quarter of 2007.

Funds of funds saw nearly $4.8bn net new money, the largest quarterly inflow since the second quarter of 2008.

About three quarters of funds experienced capital inflows and nearly two-thirds reached high watermarks in the trailing 12 months.

HFR said: “All strategy areas experienced inflows for the quarter, with the distribution of flows suggesting that allocators hold constructive yet dispersed views of the best strategic opportunities across the industry.”

Relative value arbitrage and macro posted the largest inflows, each capturing about $12bn. Relative value arbitrage including fixed income, convertibles and credit markets has made money in 26 of 27 months since December 2008.

“The growth of the industry to surpass significant threshold levels of both investor capital and fund performance validates that the hedge fund industry has completed its recovery from the financial crisis,” said Kenneth Heinz, HFR president.

Meanwhile, a survey by Preqin found funds of funds with less than $250m in assets now account for a larger proportion of managers in the industry.

It said events such as the economic downturn and the $65bn fraud perpetrated by Bernard Madoff had left investors cautious, and this had resulted in the proportion of funds of hedge funds managers with less than $250m in AuM increasing from 28% in early 2010, to 35% by the second quarter of 2011.

Overall, the mean fund of hedge funds is now $2.18bn. This is one fifth smaller than the average $2.75bn in 2010, and less than half the $4.78bn in 2009.

Unsurprisingly, the biggest decline in industry AuM occurred between 2008 and 2009, when assets fell 24%.

In 2011 the number of firms which have increased AuM outweighs the number reporting a decline, said Preqin.

The survey also found an increasing number of fund of hedge funds managers are planning to launch niche, multi-strategy funds during 2011 to satisfy investor demands for increased transparency and liquidity.

Preqin hedge fund data manager Amy Bensted said: “The fund of funds landscape is markedly different to the pre-crisis industry. Assets under management for the industry as a whole are much lower.

“There is a bimodal distribution of firms emerging, with peaks at the lower end of the scale as the smaller niche boutiques appeal to the maturing hedge fund investors, and at the larger end of the spectrum the ‘brand name’ multi-strategy firms still prove appealing to the newer investor.

“After a difficult few years for funds of hedge funds, the managers that have appropriately adapted to retain investors from the institutional market have regained some lost confidence, and numerous new funds are poised to be launched this year.

“Growth of industry assets is again in positive territory and if this new era of revived investor interest in funds of funds continues then aggregate AuM will begin to climb towards the $1bn mark.”

David Walker

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