Hedge funds: Total capital regains $2 trillion milestone

JEDDAH: Total capital invested in the hedge fund industry regained the $2 trillion milestone to conclude 2011, according to data released by HFR, the leading provider of data, indices and analysis of hedge funds.

The industry originally eclipsed $2 trillion in assets under management (AUM) in 1Q11 and peaked at $2.04 trillion at midyear before declining to $1.97 trillion to end the volatile 3Q11.

Total hedge fund AUM finished the year at $2.01 trillion, as 4Q11 performance gains offset a nominal net capital outflow of $127 million, a figure representing approximately 0.007 percent of total industry AUM.

For the full year 2011, investors allocated $70 billion of net new capital to hedge funds, a volatile performance year in which the HFRI Fund Weighted Composite Index declined by —5.0 percent, only the 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 4Q.

Discretionary and quantitative Macro hedge funds, which actively position across liquid currency, commodity, fixed income and equity markets experienced net inflows of $7.9 billion for 4Q and $27.9 billion for 2011.

Relative Value Arbitrage (RVA) strategies, which are primarily fixed income-based, attracted a net inflow of $5.9 billion in 4Q and $35.9 billion for 2011; RVA was the only main strategy to post a performance gain for 2011, with the HFRI Relative Value Index gaining +0.51 percent for the year. Following the difficult 3Q11, Equity Hedge and Event Driven experienced net outflows in 4Q11 of $8.6 and $5.3 billion, respectively, reducing full year inflows to $2.2 billion in Equity Hedge and $4.6 billion in Event Driven.

Nearly 60 percent of all hedge funds experienced outflows for the quarter, while just over 40 percent 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.

Concluding a difficult year for Funds of Hedge Funds (FOF), investors withdrew $7.2 billion in 4Q11, bringing FOF total capital to $629 billion.

“Capital flows in both 4Q 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.”