Hedge Funds to Draw $80 Billion in 2012, Most in Five Years, Barclays Says

Date: Monday, January 16, 2012
Author: Bei Hu, Bloomberg

Investors may add about $80 billion of new capital to hedge funds globally this year, the most since 2007, Barclays Plc (BARC) said in a report.

About 56 percent of investors surveyed by Barclays plan to increase such investments in the coming year, more than seven times the number that plan to reduce their allocations, the U.K. bank said in an e-mailed statement dated Jan. 13. Endowments, foundations, private banks and public pensions will most likely be the sources of new capital to the industry, it said.

This year “has the potential to be the most significant year for new capital allocations to hedge funds since 2007,” Ajay Nagpal, Barclay’s head of prime services, said in the statement.

Barclays is projecting an increase in inflows after the hedge fund industry globally posted the second-worst annual performance on record in 2011. Eurekahedge Hedge Fund Index (EHFI251) declined 4 percent last year, according to preliminary data.

Investors may also reallocate about $300 billion of existing investments to hedge funds within the same strategies or across strategies, Barclays said.

Short-Term Traders

Global macro and systematic and volatility funds may be the biggest recipients of new capital as investors look to allocate money to short-term traders with lower correlation to stock markets, it said. Macro funds bet on broad economic trends by investing in commodities, currencies to stocks and bonds. Volatility funds seek to profit from market swings.

Investors will most likely reallocate their capital within equity and credit strategies as they try to redeem out of poor performers and prefer for more specialized products, it said.

In terms of size of the funds, investors will continue to increasingly put more money into hedge funds with less than $1 billion of assets this year, Barclays said. Smaller funds already doubled their share of the net industry inflows to 18 percent last year over 2010, it said.

Smaller Managers

“Smaller managers are frequently seen by investors to be more agile in adapting their existing strategies to generate alpha,” said Louis Molinari, head of capital solutions within Barclays’ prime services division. ‘With the greater transparency and better fee and liquidity terms that many new and smaller funds offer, investors continue to gain confidence with investing in this segment of the hedge fund industry.”

Alpha is the premium an investment portfolio earns above a certain market benchmark such as the Standard & Poor’s 500 Index in the U.S.

The Barclays report was based on interviews and a survey of investors at a symposium in New York with about $4 trillion of assets under management, including $500 billion in hedge funds, or a quarter of industry assets, it said in the statement.

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