Industry assets hit $1.9 trillion

Date: Thursday, January 31, 2008
Author: William Hutchings, Financial News US

Investors poured a record amount of capital into hedge funds last year, adding almost $200bn (€135bn) and helping the industry’s total assets increase to just under $1.9 trillion, according to data provider Hedge Fund Research.

The $194.5bn hedge funds raised last year beat the $126bn raised in 2006, the $99bn of 2002 and $91bn of 1997. Investment performance, estimated as between 10.4% and 11.6%, combined with the inflows to take the industry’s assets from $1.46 trillion at the end of 2006 to $1.87 trillion.

The flows reached a peak of $60.2bn in the first three months of last year. The second three months’ flows were the second highest on record, as investors were encouraged by hedge funds generating positive returns in February when the markets, led by China, took a temporary downturn. But hedge fund investment losses in August and November cooled investors’ ardour.

Relative value was the most popular strategy last year, taking $46bn. Managers who follow it try to identify opportunities to arbitrage fixed income securities, typically by identifying pairs of bonds or related derivatives and offsetting a long position in one with a short position in the other, in the hope of making profits when their prices converge.

Long/short equity, which is the largest strategy with $507bn, raised $41bn during the year, according to Hedge Fund Research. Annual flows into the funds, whose portfolios comprise positive and negative positions in companies’ shares, rose in 2005, 2006 and 2007. However, last year’s best quarter was between January and March and fundraising fell in each successive three-month period. Just $14m net was raised between October and December.