Hedge Funds Make A Comeback

They’re back! Two separate research reports issued last Friday chart the steady return of hedge funds from the disastrous two-year period after the market meltdown, which saw liquidations and significant declines in total hedge fund investments.

Hedge fund assets hit $2.47 tn at the end of 2010, up 5.7 per cent in the fourth quarter, driven mainly by performance and – to a lesser extent – investor flows, according to HedgeFund.net (HFN), an online news site owned by New York-based broker-dealer Channel Capital Group. 

HFN notes that the 2010 total was short of the $2.86 tn recorded in 2007 before the financial crisis, but up from a low of $1.93 tn in 2008, according to wire service reports.

Hedge funds’ asset-weighted returns hit 10 per cent last year as 63 per cent of funds in HFN’s database surpassed their historical high-water mark. That high-water mark represents the peak value a fund has reached in the past, above which managers can start charging a fee on fund profits. 

Hedge funds investing in Asia had the highest rate of growth regionally, while European-focused funds reported net redemptions, reports HFN. Investors favoured fixed-income investment strategies over equity-focused funds, as measured by the rate of growth in new investor money.

HFN’s report was based on its database of more than 7,100 hedge funds, fund of hedge funds and managed-futures products. 

New hedge fund launches outpaced liquidations for the first time since 2007, according to a separate report from Chicago-based Hedge Fund Research (HFR), which tallied 935 new fund start-ups and 743 liquidations in 2010.

That represents the highest number of launches and the lowest number of liquidations since 2007 when nearly 1,200 new hedge funds were launched, says HFR. The research firm estimates that hedge fund assets hit $1.9 tn at the end of 2010.

A total of 220 new funds launched in the fourth quarter of 2010, reports HFR, which represents the second-lowest quarterly launch total of the last six quarters. But only 158 funds liquidated in Q4, the lowest number of liquidations since the fourth quarter of 2007 and approximately 20 per cent of the record total of 778 funds liquidated in the volatile last quarter of 2008. 

The HFRI Fund Weighted Composite Index posted 10.3 per cent returns for 2010. The top decile returned an average of 43.2 per cent while the bottom decile declined by 14.6 per cent, according to HFR. 

JPMorgan holds nearly 30 per cent of the market share as prime broker for hedge funds and Goldman Sachs 20 per cent, according to HFR. Average incentive fees fell to 18.95 per cent industry-wide, the lowest level since HFR began tracking aggregate industry fee structure. Average management fees are unchanged at 1.58 per cent, reports HFR.

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