October 18, 2012 / 3:01 PM / 7 years ago

Hedge funds reach record size thanks to recent strong returns

BOSTON, Oct 18 (Reuters) - Strong returns during the third quarter have boosted the hedge-fund industry to its largest size ever, offsetting a more muted appetite among investors for these types of funds, research data shows.

Global hedge funds now oversee $2.2 trillion in assets, up from $2 trillion at the end of the 2011 and more than double what they invested for their wealthy clients in 2005, new data released by Hedge Fund Research on Thursday show.

Assets grew by $80 billion during July, August and September with some $70 billion coming from better performance and only $10.6 billion coming from net new investments from clients.

So far, pension funds, endowments and wealthy individuals invested only $31 billion net new capital into hedge funds this year, compared with $70.6 billion in 2011, when funds mostly lost money, and $194.5 billion in 2007 just before the financial crisis.

“If inflows continue at their current pace through the end of the year, 2012 would have the lowest inflow total since 2009, when investors withdrew $131 billion from the hedge fund industry,” the Chicago-based research said.

This is bleak news for an industry dwarfed in size by the mutual fund industry but able to attract some of the world’s savviest investors with the promises of big paychecks and more investing freedoms. Big name investors have long been attracted to hedge funds because their managers can short, or bet against a security, thereby having more tools at their disposal to deliver better returns.

While many large pension funds, including North Carolina and Florida, are still looking to make hedge fund investments, industry data show that investors are becoming more cautious by sticking with established funds and being quicker in pulling money out if they are not satisfied with results.

HFR said that clients clearly prefer larger and longer established firms, having sent $13 billion of overall inflows to firms that manage at least $5 billion in assets.

Certain long popular strategies were also hit by redemptions even though they performed relatively well.

Investors removed $5.2 billion from “equity hedge” funds which buy and sell stocks and are up 5.5 percent this year. “Event driven” strategies, which are up 5 percent this year, saw $1.3 billion in redemptions.

Funds pursuing relative value arbitrage strategies, where managers hope to profit from price differentials between related financial instruments, are delivering the year’s best returns and are therefore also attracting the most in new money, HFR found. Investors put $12.6 billion in new capital into these types of funds that have gained 7.9 percent this year.

Overall performance at hedge funds has been middling with the average fund gaining 4.76 percent through the end of September. The Standard & Poor’s 500 index is up 16 percent this year.

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