Strong Year for Hedge Funds Means Returning Investors and More Funds
Last year was a very good year for hedge funds. According to the New York Times Dealbook, BarclayHedge, which tracks the flow through hedge funds, reported that 2009 was the best year in the industry’s history (since BarclayHedge began tracking the data in 2000) in terms of performance when compared to the S&P 500. The industry’s resurgence has been nothing short of a Lazurus-like resurrection from the 2008 financial crisis that followed Lehman’s collapse. On the whole, hedge funds were down 18 to 19 percent at the end of 2008. In contrast, the average hedge fund returned 19 percent in 2009. It’s been a pretty miraculous turnaround. No one can deny that. And investors are responding by pouring money back into the industry, particularly into those funds “focused on distressed debt, fixed-income and so-called event-driven strategies where a manager takes a position in a company because he believes its situation is about to change,” according to the New York Times.
BarclayHedge reported that investors invested some $16.6 billion in hedge funds in February alone, with industry assets totaling an all-time high of $1.5 trillion, putting it within range of the projected $2 trillion mark before the year is out.
The New York Times reports that Deutsche Bank’s Alternative Investment Survey projected that a total of $222 billion would be invested in hedge funds this year. It’s an ambitious number, especially in light of the negative light cast upon the industry by Paulson and Co. and Magnetar’s recently disclosed involvement in betting against the housing market. Public sentiment will almost certainly be turned against all hedge funds, who the average American may inaccurately equate with the people who brought down the housing market– but, then again, the average American is not your typical hedge fund investor. Hell hath no fury like a foreclosed home owner… or something like that. Well, except for this guy.
Despite the return of investors to the hedge fund industry, there’s been a drought of seeding capital, according to the Financial Times (subscription required). One reason for the continuing lack of capital is the decline in seeding activity from investment banks in the wake of the Lehman Brothers collapse as banks have focused their attention on larger issues. Furthermore, amid the uncertainty of the new financial regulation, which may eliminate their ability to participate in proprietary trading and hedge fund activity, many banks may be hesitant to provide seeding capital. Fund of funds are currently the main seeding investors, followed by followed by asset management companies and family offices, according to a survey by Deutsche Bank. And with due diligence becoming a more pressing issue for investors, money is being handed out less liberally and in smaller amounts.
One consequence of the financial mess that ensued in 2008 is that investors are demanding more liquidity and greater transparency. Of course, just because investors want these things doesn’t mean they will necessarily get them, but there is a collective demand being voiced. And some funds are obliging. Another trend is that investors are doing significantly more due diligence before investing with a strategy. Regardless of the fact that investors are taking a couple extra months to do due diligence and demanding shorter lockups, more liquidity and greater transparency, they’re pouring money into hedge funds at a record-setting pace.
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