Despite Credit Woes, Hedge Fund Industry Continues To Grow

Feb 13 2008 | 8:30am ET

The hedge fund industry is still attracting new money, but not as rapidly as it once did. 

Excluding performance gains, the industry grew by 16.95% last year compared to 26.81% in 2006, according to an updated report released by Hedgeco.net and Institutional Investor.

Assets managed by hedge funds increased an estimated 3.98% in the fourth quarter of 2007, reaching $2.787 trillion. This compares to an increase of 9.82% in the fourth quarter 2006. Performance accounted for $68.06 billion of the Q4 increase, and new allocations of $42.8 billion were offset by an estimated $4.16 billion in liquidations. Net allocations of $38.64 billion were the smallest in a quarter since Q4 2005.

Meanwhile, funds of funds asset levels increased by 4.63% in the last quarter of 2007 to reach an estimated $1.338 trillion compared to an increase of 2.39% in Q3 2007. However, performance gains, not inflows, accounted for the majority of the rise.

Fund of funds attracted an estimated $35.88 billion in new assets in Q4 and $170.05 billion in all of 2007 compared to $215.17 billion in 2006. New allocations in 2007 increased total funds of funds assets by 15.77% compared to 27.62% in 2006. Fund of funds assets account for 48% of assets in hedge funds; a slight increase from Q3 yet down from 50% in Q4 2006.

Equity Vs. Debt Focused Hedge Funds

Despite performance gains for the quarter, investors withdrew money from hedge funds focused on equity markets, perhaps an indication that large institutions felt the asset class had become over valued.

An estimated $1.5 billion left equity focused funds during the quarter; the group's first net outflow on record. Performance increased total assets to $1.074 billion, a rise of 1.74% from Q3. Fixed-income focused fund assets rose 7.59% in Q4 due in part to net allocations of $15.09 billion. Last quarter was the second quarter in a row in which investor allocations accounted for a larger percentage increase in fixed income strategies than equities.

Distressed

Total assets in distressed hedge funds rose 7.04% in Q4 2007 to an estimated $228.83 billion. Although the average distressed fund was -0.66% in Q4, larger funds performed well enough for performance gains to account for the vast majority of the total asset level increases in Q4.

For the full year, $44.06 billion in new assets entered distressed hedge funds compared to $28.7 billion in 2006. The distressed space has been one of the fastest growing hedge fund strategies in the past two years.

Emerging Markets

Performance losses in August likely led to investors cooling on emerging market hedge fund allocations in Q4 2007. New allocations were essentially flat, $3.2 million of inflows, but Q4 performance gains increased total asset levels 5.21% to an estimate $314.58 billion. On a month by month basis; performance losses in August were followed by redemptions in September and losses again in November caused more outflows in December.

For the year, EM hedge funds attracted $48 billion in new assets compared to $38.88 billion in 2006 resulting in organic growth (growth of assets not including performance) of 22.64% in 2007 compared to 31.5% in 2006.

Global Macro

With the average global macro fund returning 2.96% in the turbulent Q4, both performance and new allocations to the strategy helped total asset levels rise an estimated 8.9% to $149.29 billion. New allocations in the quarter were an estimated $5.35 billion, compared to a net reduction of almost $2 billion in Q4 2006.

For the year, macro funds took in an estimated $10.44 billion compared to $17.48 billion in 2006. Despite attracting fewer assets than the year prior, macro funds appear to have stopped a trend of redemptions which began in Q3 2006 and consisted of three straight quarters of assets leaving the strategy.

Long/Short Equity

Long/short equity fund assets grew at a slower pace than the broad industry for the first quarter since Q3 2006, and only the second time on record. Total assets in long/short equity funds grew an estimated 1.75% to $810.74 billion. There was a net outflow of assets from these funds in Q4 as $310 million was pulled out of the strategy meaning the increase in total assets was solely due to performance gains.

CTA/Managed Futures

Strong moves in commodities, currency and interest rate markets benefited CTA/managed futures products in Q4 as the strategy was one of the best performers, returning an average of 5.78% in the quarter.

Total asset levels rose 7.24% to an estimated $163.63 billion as funds attracted $3.64 billion in new money.

For all of 2007, CTA/managed futures products took in an estimated $18.77 billion, a dramatic turnaround from 2006 when an estimated $1.09 billion was withdrawn.


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