Total capital invested in the hedge fund industry returned to $2 trillion at the end of 2011, according to the latest Hedge Fund Research data.
The industry first hit $2 trillion in AUM in the first quarter of 2011, peaked at $2.04 trillion mid-year, then declined to $1.97 trillion in Q3. By the end of Q4, however, total hedge fund AUM was at $2.01 trillion, as performance gains offset a nominal net capital outflow of $127 million for the quarter.
For the full year 2011, investors allocated $70 billion of net new capital to hedge funds, although the HFRI Fund Weighted Composite Index declined by 5.0% last year—only its third calendar year decline since 1990.
Investors exhibited a clear preference for macro and relative value arbitrage strategies in both the fourth quarter and the full year, while equity strategies experienced net withdrawals for Q4.
Discretionary and quantitative macro hedge funds, which active position across liquid currency, commodity, fixed income and equity markets, took in net inflows of $7.9 billion for Q4 and $27.9 billion for 2011. Relative value arbitrage strategies, primarily fixed income-based, attracted a net inflow of $5.9 billion in the fourth quarter and $35.9 billion for 2011—the only main strategy to post a performance gain for 2011.
Equity hedge and event-driven funds saw net fourth quarter outflows of $8.6 billion and $5.3 billion, respectively, reducing full-year inflows to $2.2 billion in equity hedge and $4.6 billion in event driven.
According to HFR, nearly 60% of all hedge funds experienced outflows for the quarter, while just over 40% attracted inflows. For the full-year 2011, investors allocated $50.7 billion of net new capital to firms with greater than $5 billion in AUM, while firms with less than $5 billion experienced a combined net inflow of $20 billion.
Funds of hedge funds, which generally had a tough year, lost another $7.2 billion to withdrawals in Q4 2011, bringing total FOF capital to $629 billion.
“Capital flows in both Q4 and 2011 have followed a consistent theme of reducing directional equity market beta while increasing exposure across currency, commodity and fixed income strategies, as investors position for continuing macro volatility and spread convergence in 2012,” said Kenneth J. Heinz, president of HFR. “The complexity and breadth of the European debt and currency crisis contributed to a challenging environment for hedge funds in 2011 and, as a result, investors are tactically positioning exposures to provide positive portfolio optionality and to monetize opportunities created by fluid developments in this ongoing crisis.”