The popularity of hedge funds, particularly among institutional investors, propelled total assets under management to a record $2 trillion in the first quarter, according to a report from Hedge Fund Research Inc. of Chicago.
Not only did total assets under management eclipse the previous record of $1.93 trillion set in the second quarter of 2008, but steady inflows and the stock market's strong recent performance have pushed hedge fund assets up more than 50% from the nadir of the economic crisis in early 2009. The report was released Tuesday.
"The growth of the industry to surpass significant threshold levels of both investor capital and fund performance validates that the hedge fund industry has completed its recovery from the financial crisis," Kenneth Heinz, the president of Hedge Fund Research, said in the report. "The strategic and structural qualities of investor accessibility and transparency, which have defined the evolution of the industry in [the] past two years, will serve as the primary catalysts for growth to surpass future milestones."
Hedge funds, which continue to garner large investments not only from wealthy individual investors, but also institutional firms looking for more diverse and higher-performing investment outlets, received $32 billion in new capital in the first quarter — the largest quarterly net inflow since the third quarter of 2007.
The report found that all strategy areas had inflows for the quarter, suggesting that allocators hold constructive and widely dispersed views of the best strategic opportunities across the industry. Relative value arbitrage and macro strategies posted the largest investor inflows, with each capturing about $12 billion in new capital. Relative value arbitrage strategies, encompassing exposure to fixed income, convertible securities and credit markets, have posted monthly performance gains in 26 of the 27 months since December 2008.
Meanwhile, event-driven strategies had the smallest capital inflows, attracting $2.2 billion, despite producing the strongest area of industry performance in 2010 (up 12%) and the first quarter of 2011 (up 3.5%).
Because of their increasing popularity and the impending implications of new Securities and Exchange Commission and state-mandated regulations throughout the financial services industry, hedge funds are investing in new technology and procedures in anticipation of more stringent regulatory requirements.
According to the Boston financial research and consulting firm Celent, North American hedge funds will increase their information technology spending at a compound annual growth rate of 4.4% a year through 2014, while hedge funds in Europe will increase their technology spending by 5.6% and funds in Asia by 7.2% per year for the next three years.
Meanwhile, according to the Chicago advisory firm Horizon Cash Management, one of the unintended consequences of the Dodd-Frank Act has been the demise of money market fund returns that hedge funds and other institutional investors had come to rely on for a decent return on large piles of idle cash temporarily sitting on the sidelines.
Dodd-Frank required the Federal Deposit Insurance Corp. to increase its deposit insurance fund and expand the assessment base used to calculate bank insurance premiums.
Jill King, a Horizon partner and senior portfolio manager, said that caused returns in the federal funds market and overnight repurchase agreement to plummet.
Before the FDIC assessment was enforced on April 1, the overnight repo rate was averaging between 12 and 15 basis points for the first four months of the year. Now it's down to only 1 or 2 basis points and, from Horizon's perspective, making active cash management services a much more viable and profitable option.
