Hedge industry will enjoy $80bn net inflows in 2012, says Barclays

Hedge funds are expected to take net inflows of $80bn this year despite recording their second worst year of performance in two decades in 2011, as they faced some of the most difficult markets to navigate in a generation.

By September the $2trn industry had taken in $70.7bn net new business, despite being well on its way to losing about 4% for the whole year, according to Hedge Fund Research.

This was the funds’ second worst year since 2008, when they lost 20%.

Investors seem to have in mind how difficult it has been for managers to make profits in 2011, as investors plan to put about two thirds of new money in 2012 into strategies typically thought to deal better with difficult markets. These are global macro, systematic and volatility-based strategies.

Barclays Capital forecast in its industry prognosis for 2012 that $300bn would be switched between managers and strategies, on top of the $80 fresh capital in 2012.

Ajay Nagpal, head of prime services at Barclays Capital, said called this year “potentially the most significant year for new capital allocations to hedge funds since 2007”.

But poor performing funds beware – about 40% of investors plan to redeem from sub-standard performers this year, and one-third of respondents had already filed redemption notices by October, while two-thirds planned to file notices by the end of the year.

“Equity hedge funds should prepare to fight for reallocated flows, as they are likely to see $100bn of reallocations but close to zero in new flows. We expect a ‘shakeout’ in the equities space as many investors will use 2011 performance to separate ‘winners’ from ‘losers’,” the bank said.

Although Barclays expected no net flows to funds of hedge funds – the fifth year running this would happen – it noted “funds of funds refuse to die and, while under pressure, continue to provide important services to their investors”.

Barclays found nearly two-thirds of investors planned to maintain their current allocation levels to funds of funds, but of those that plan to change the allocation, nearly twice as many investors plan to decrease it compared to those planning to increase it.

To make these forecasts Barclays surveyed 165 investors who, in the third quarter of 2011, provided the $2trn industry with about $500bn its total assets.

It found pensions will provide about half the net inflows this year, followed by $20bn from private banks and their clients, $8bn from insurers, and $6bn from endowments and foundations, and family offices.

The bank noted investors “remain committed to hedge funds overall”, but they expect increased turnover among managers.

Some 60% of investors plan to increase the number of managers they allocate to, versus only 15% who plan to reduce, and most (56%) expect to increase allocations overall versus only 8% who plan to decrease.


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