The hedge fund industry grew more in the fourth quarter than at any other time in its history, pushing the sector to near its all-time high in total assets under management.
The industry was $149 billion larger at the end of December than at the end of September, according to Hedge Fund Research data. Most of that increase came through strong performance—hedge funds rose an average of about 5% in the fourth quarter, half of their average return for last year—but investors chipped in, too. Net inflows for the fourth quarter were $13.1 billion, and 2010's total net inflow of $55.5 billion was the highest total since 2007.
The fourth-quarter gains top the previous record, set in the second quarter of 2007 at $140 billion. All told, hedge funds now manage $1.917 trillion, near their all-time high of $1.93 trillion.
"The second half of 2010 was a historic time in the hedge fund industry, characterized by powerful and pervasive trends shaping the institutional landscape of the hedge fund industry," Kenneth Heinz, HFR president, said. "As the industry is positioned to surpass its previous asset peak, global investors are focused on the dynamics of inflation protection, strategic specialization, enhanced liquidity, improved structure and transparency for accessing hedge fund performance within coming years."
Last year, the biggest beneficiaries of investor inflows were relative value funds, which took in $21.5 billion in new money. Macro funds, which led in the fourth quarter with $6.6 billion, enjoyed inflows of $17.3 billion in 2010, while event-driven funds added $14 billion.
Investors also showed a growing preference for smaller hedge funds: During the full year, more than 80% of net inflows went to firms with more than $5 billion in assets, but during the fourth quarter, only 51.6%. Investor confidence extended even to funds of hedge funds, which enjoyed their second straight quarterly inflow with $1.8 billion in net new money.