Hedge fund AUM on track to hit $2 trillion by year end

The hedge fund industry is within 2% of its previous high watermark, achieved in October 2007. The HFRI Fund Weighted Composite Index gained 2.56% in the first quarter, according to the latest data from Hedge Fund Research.

In the first quarter the recovery continued with investors allocating $13.7 billion of new capital to the global hedge fund industry. Combined with a performance-based asset increase of $54 billion, this brings the total invested into hedge funds to $1.67 trillion and puts the industry on track to hit $2 trillion by the end of the year. Various surveys of the industry over the recent months have calculated that AUM could reach $2 trillion by the end of 2010 or in 2011.

All four main strategy areas saw asset growth in the quarter. Event driven strategies had $5.6 billion of new capital inflows. Performance for the strategy was also strong with the HFRI Event Driven Index up 4.7% in the period, driven by significant contributions from activist and distressed sub-strategies.

The smallest net inflow was in macro strategies. These received less than $1 billion of new capital. Macro funds posted only a modest gain of 0.2% for the quarter. Performance was undermined by commodity weakness, falling volatility and a lack of persistent trends across asset classes.

Equity hedge and relative value strategies posted asset and performance gains for the quarter. Relative value has now had 15 consecutive months of performance gains.

While 60% of all funds experienced net inflows for the quarter, inflows were concentrated in the industry’s largest companies. Investors allocated $14.9 billion to companies with more than $5 billion in assets under management (AUM).

Companies managing between $500 million and $5 billion experienced net outflows of $3.7 billion combined.

The overall concentration of industry assets increased. Companies with AUM of over $5 billion, representing 5.1% of all funds, now manage over 62% of total industry capital, according to Hedge Fund Research data.

Larger funds narrowly outperformed smaller funds during in the first quarter and 2009. The asset-weighted version of the HFRI Fund Weighted Composite Index gained 2.8% in the first quarter and was up 20.3% in 2009.

52.2% of funds reached their high watermark in the trailing 12 months. In addition to an increased interest in allocating through managed accounts, investors continue to demonstrate interest in Ucits III compliant vehicles.

“In contrast to the environment of the last two years, the drivers of hedge fund performance have recently shifted to tightening corporate credit, declining equity market volatility, currency adjustments and rising sovereign credit risk,” said Ken Heinz, president of Hedge Fund Research.

“While allocations reflect continuing trends in event driven and arbitrage strategies, investors are also focusing on fund structure and transparency, as well as new opportunities presented in currency, commodity and fixed income markets,” he added.