Buoyed by Institutional Investor Activity, Hedge Fund Assets Reach Peak

(April 20, 2011) — Despite tough times for the hedge fund industry, with stock and bond prices driven lower as a result of crisis in the Middle East and Japan, assets have rebounded to an all-time high, data from Chicago-based Hedge Fund Research (HFR) has shown.

The flow of institutional money — particularly from sovereign wealth funds and public pensions funds in the United States — coupled with greater efforts to increase transparency and accessibility have fueled the hedge fund industry, Neel Mehta, a consultant on Towers Watson’s hedge fund research team, tells aiCIO. “I think transparency and accessibility go hand in hand,” he says. “After 2008, which was a shock to the industry, changes obviously needed to be made,” he indicated, adding that hedge funds weren’t hurt as badly during the financial crisis as other asset classes. According to Mehta, institutional investors have been successful in demanding greater transparency from hedge funds, which seek stable capital.

As firms continue to seek diverse and higher performing investment opportunities, Mehta says he has witnessed a significantly greater number of new hedge fund launches this year compared to ever before. “I think people are seeing this wave of money coming to hedge funds, and others are following,” he noted.

The financial crisis and recession pummeled the hedge fund sector, forcing nearly 700 hedge funds to close in the first three quarters of 2008. Since then, the popularity of hedge funds, largely among institutional investors, has driven industry assets to $2.02 trillion as of March 31, Hedge Fund Research found. Total assets under management topped the previous high of $1.93 trillion in the second quarter of 2008, with hedge fund assets up more than 50% from the nadir of the US economic crisis in the first quarter of 2009. Additionally, the report by HFR found that assets invested in hedge funds and funds-of-funds rose a combined $102 billion in the first quarter, while net inflows into single and multistrategy hedge funds totaled $27.7 billion. Meanwhile, hedge funds-of-funds gained $4.8 billion of net inflows.

Kenneth J. Heinz, HFR president, said in the firm’s latest inflow and performance report: “The growth of the industry to surpass significant threshold levels of both investor capital and fund performance validates that the hedge fund industry has completed its recovery from the financial crisis.”