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U.S. hedge funds pull in $73.6 billion in '04

Date: Monday, January 17, 2005

The hugely popular U.S. hedge fund industry grew by 19 percent last year when the loosely regulated investment pools pulled in $73.6 billion in new assets, according to data released on Thursday. Hedge funds now manage roughly $972.6 billion in assets, according to database group Hedge Fund Research Inc. (HFR). Investors added $27 billion in new money in the last three months of the year, marking a sharp increase from $16.9 billion taken in during the July through September quarter. "We saw a very strong fourth quarter and momentum had already returned in the third quarter, so people are clearly thinking things are going to improve," HFR president Joshua Rosenberg said. In the last three months of the year, hedge funds returned 5.3 percent. Hedge funds that seek out companies facing bankruptcies, mergers or acquisitions, grew at the fastest pace in the industry, expanding 28 percent to end the year with $128.6 billion in assets, HFR said. Fund of funds, which select a portfolio of individual hedge funds, mixing strategies to spread the risk, had the most assets under management with $358.6 billion HFR data show. While hedge funds still manage only a fraction of the $7.8 trillion invested by mutual funds, their assets have ballooned from about $150 billion a decade ago. Last year's inflows did not set any records and were off from the $198 billion hedge funds added in 2003, according to HFR data, but they suggest that the asset class remains very popular with a wide variety of investors. Pension funds, charities and college endowments poured in billions of dollars even as many fund managers struggled to deliver the sort of returns that made the industry famous. In 2004 the average fund returned 9.64 percent, trailing the average stock mutual fund's 11.96 percent return and their own 15.44 percent gain in 2003, according to data from Credit Suisse First Boston Tremont Index LLC and Lipper Inc. And demand is not likely to let up. Rosenberg said he expects hedge fund industry assets will top the $1 trillion level in the next three months as hedge funds market themselves more aggressively as an asset class designed to make money in all markets. However some statistics suggest that hedge funds' newfound popularity might not be a good thing for returns. For example the best performing university and college endowments moved money out of hedge funds as they became very popular, according to a survey by educational consulting group Commonfund Institute. Also hedge funds produced some of the lowest returns of the year for the $36 billion Massachusetts state employee pension after the fund decided to move roughly 5 percent of its assets into these types of funds. Hedge funds returned about 5 percent while the fund's real estate portfolio returned about 29 percent.