Hedge Fund Assets to Hit $2 Trillion by Year-End, Survey Says

Date: Tuesday, April 6, 2010
Author: Bei Hu, Bloomberg

Global hedge fund assets may return to the pre-financial crisis peak of almost $2 trillion by year- end, boosted by investment profits and capital inflows, according to a Credit Suisse Group AG survey of investors.

Industry assets may grow 25 percent from the $1.6 trillion at the end of 2009, according to the annual survey published today. The Zurich-based lender polled about 600 institutional investors worldwide with about $1 trillion of hedge fund assets between them, or above 60 percent of the industry total.

Hedge funds posted the strongest annual return in a decade last year, helping to reverse capital outflows in the second half of 2009. Assets are expected to expand even as investors take more time to make allocation decisions, demand more transparency and cut the number of holdings, the survey found.

Asia-Pacific will likely be the biggest beneficiary among all geographies, with 61 percent of investors indicating they are increasing or considering raising their allocations to managers focused on the region, the survey said.

“The best hedge funds have demonstrated their ability to outperform both rising and falling markets,” said Benjamin Happ, Hong Kong-based Asia-Pacific head of capital services in Credit Suisse’s prime services division. “This is attracting an ever-greater allocation of assets from investors looking for stability and growth.”

Investors indicated they are most likely to add investments in macro and event-driven funds.

Pre-Crisis Peak

“Some of the broad policy decisions, the country and supranational decisions, are weighing heavily on the investment horizon,” Happ said.

Hedge fund assets peaked at $1.93 trillion in the second quarter of 2008 before the credit crisis deepened. Hedge funds lost 19 percent that year, the largest annual loss in history, according to Chicago-based data provider Hedge Fund Research Inc. Investors redeemed a record $154 billion that year, leading managers to restrict withdrawals and create separate pools for hard-to-sell assets.

Sixty-five percent of the investors surveyed by Credit Suisse said they are spending more time on due diligence investigations of managers they may invest in than before the financial crisis. On average, investors spend 5.9 months on such reviews, it said.

A Credit Suisse survey of hedge fund managers released in February found the due diligence process has lengthened by 30 percent since September 2008.

Longer Lockups

“Investors are taking the time to make sure that they understand the strategies, the hedge fund managers and all of the things that go into their investments,” Happ said. “Hopefully that will over time lead to even greater amount of stability in the investments that are made.”

Hedge fund managers are trying to lure back investors with promises to increase disclosure and cut fees in exchange for longer lockups, the survey said. Ninety-four percent of the investors said they are receiving more information from managers, according to the latest survey.

Globally, the average number of hedge fund holdings of investors has fallen 17 percent since September 2008 to 48 today.

“Investors are taking a more selective, thoughtful approach and concentrating their investments with the managers in whom they have the greatest degree of trust,” Happ said.

Worldwide, investors’ initial investment in a fund averages $18 million, with long-term holdings of $33 million, the survey found.

To contact the reporter on this story: Bei Hu in Hong Kong at bhu5@bloomberg.net.