Reduced competition from large hedge
funds and fewer investors on the sidelines should help small and
mid-sized managers capture a greater share of inflows in 2011, according
to Agecroft Partners.
Hedge fund assets grew to $1.77 trillion in the third quarter of
2011, close to their pre-crisis peak of $1.9 trillion, according to
Hedge Fund Research. However, almost 75% of new capital raised during
this period went to hedge funds with more than $5 billion in assets,
leaving smaller funds struggling to grow.
"2009 and 2010 were devastating for small and medium-sized hedge
funds. Even though these managers represent 95% of the number of hedge
funds, they were only able to attract a small fraction of new hedge fund
allocations," said Don Steinbrugge, chairman of marketing specialist
Agecroft Partners.
Steinbrugge believes "a much larger percentage of assets will flow to
small and mid-sized managers" in 2011. He attributes this to "less
competition from the large, well-known hedge fund managers, as well as
increased allocations from endowments, foundations and hedge fund of
funds".
The largest hedge funds were raising capital aggressively in 2009 and
2010 as they sought to replace funds lost in the aftermath of the
financial crisis. "After two years of the majority of assets flowing to
the largest hedge funds combined with strong performance, many of these
big funds have either closed or are near capacity," said Steinbrugge.
Foundations and endowments are also coming back into the market after
sitting on the sidelines for the past two years, Steinbrugge said. "This
will especially benefit mid-sized hedge funds as these sophisticated
investors tend to have a bias against the largest hedge funds."
Steinbrugge also believes funds of hedge funds (FoHFs) will focus
more on smaller managers and niche strategies in 2011. Institutional
investors have been increasing direct allocations to well-known hedge
funds or gaining exposure to these managers through a single investment
in a large FoHF, he said. This is creating more demand for FoHFs which
focus on smaller managers that do not overlap with other parts of the
institutional investor's portfolio.
Agecroft expects to see increased allocations across all segments of
the hedge fund industry in 2011 with small and mid-size funds capturing
a noticeably larger share of overall inflows.
Steinbrugge also predicted that 2011 will be "the best year for hedge
fund launches since 2007" with "multiple billion-dollar hedge fund
launches" as financial institutions spin off their proprietary trading
desks.
Agecroft's projections are based on several dominant and emerging
trends identified through conversations with more than 300 hedge fund
organisations and 1,500 institutional investors during 2010.
